How Do You Calculate Accounts Payable Days?

Accounts payable days is a significant figure that indicates the number of days a company takes to pay off its accounts payable or its bills from the suppliers. It gives information on how it pays its suppliers and how it manages its cash inflows. When this metric is measured consistently, a business can analyze this metric and find out if the business is gradually paying off vendors in quicker intervals or if it is taking longer.

What are Accounts Payable Days?

Accounts payable days reveal the average time it takes for a company to pay their suppliers and vendors. This is derived by dividing the balance in the accounts payable line item by the daily cost of goods sold or purchases and then multiplying the result by 365 days.

The accounts payable balance is the total number of dollars that a business owes its vendors and suppliers at a specific time. Cost of goods sold: The cost of manufacturing goods sold by the company indicating direct costs associated with the production. Purchases may be used instead where the cost of goods sold is not easily identifiable.

Why Is Calculation Of Accounts Payable Days Important?

Here are some reasons why monitoring and calculating accounts payable days is important for businesses:

1. Evaluate Payment Practices: It helps the businesses to determine the rate at which they are paying invoices and bills from the vendors. One of the effects of slow payment is that it can make relations between the supplier and the buyer sour.

2. Assess Financial Health: The metric is useful in determining the financial performance of an organization in the ability to manage cash and accounts receivable and payable. High account payable days may show problems regarding the cash flow of the business.

3. Identify Inefficiencies: Fluctuations in the accounts payable days make it easy to discover inefficiencies or issues in the invoice processing and vendor payments process.

4. Compare to Industry Benchmarks: The accounts payable days can also be compared to other businesses within the same industry to establish the performance level of the business.

This means that any change in the accounts payable figure, whether through increased expenditure on inventory or a change in payment terms, will affect the accounts payable days.

Step 1) The first step in the process of delivering the Accounts Payable management report is to establish the balance of the Accounts Payable.

Find the accounts payable balance total from the balance sheet of the company in the period that interests you. However, it should be remembered that you can compute this for any timeframe – monthly, quarterly, or even annually.

Step 2) The second step is the cost of goods sold This step is focused on the cost of acquiring the goods that the business has sold.

If included in the company’s income statement, state the cost of goods sold for the same period as well. COGS refers to the overall expenses that are incurred in the production of goods or the provision of services by the company. If COGS is not available, the purchase amount will do well to substitute for it.

Step 3) By using the accounts payable turnover formula we will calculate the ratio for this company.
After that, calculate the simple moving average of the Cost of Goods Sold amount and the Accounts Payable balance for the selected period.

Formula:

Accounts Payable Turnover = Cost of Goods Sold / Accounts Payable

The turnover rate indicates how often a company turns over its payables turnover or gets paid within a given timeframe.

Step 4) Days in accounts payable = 365 days * accounts payable / total credit sales

With the AP turnover rate, you can now determine the business's accounts payable days using this formula:

Formula:

Accounts payable days = 365 / accounts payable turnover

Basic calculations involve dividing 365 days by the AP turnover obtained earlier.

365 days are the total days in a year and the turnover ratio shows how many times payables turn over in the year. One divides the other to give the time required to turn over the payables balance once.

Step 5) Analyse & Compare

In this context, a higher AP days formula means that the company is using more time to pay its bills, whereas a lower AP days formula means that the company has shorter payment cycles.

You can then compare the metric over the months or years to establish any worrying trends for your business. Accounts payable days can also be used to compare business performance with other organizations in the industry. For instance, companies may set a goal of achieving better results than the industry average AP days.

Steps to control AP days

Here are some tips to effectively monitor accounts payable days:

- Use the above method and calculate consistently to allow comparison over time.
- Sort the number by the type of supplier or vendor to find out which one of them has a long payment duration.
- Measure with existing industry standards and practices
- An example of setting a target is to be below the industry average, let's say.
- Substitute where possible by applying the accounting software to gather updated data.
- Scenario analysis should be accompanied by elements such as cash flow and working capital figures to get a broader perspective.

The measure of accounts payable days is a helpful guide to monitor cash flow and can be used effectively to maintain good relations with suppliers and sustain a firm’s financial health in the long term.

Contact us here for an accounts payable solution.