Document

Accounts Payable Days: Formula, How To Calculate, Examples

By Athena Rebello

|

Updated on: Nov 17th, 2023

|

13 min read

social iconssocial iconssocial iconssocial icons

Accounts Payable (AP) is a short-term liability representing money due to suppliers for credit purchases made. It impacts the company's financial performance, credit conditions, and ability to attract investors. Regularly analysing the accounts payable turnover and days can assist organisations in meeting deadlines and avoiding defaults. 

Continue reading as we discuss accounts payable days, importance, and how to calculate them.

What Are Accounts Payable Days?

AP days or days payable outstanding (DPO) represents the average time (in days) it takes for a firm to pay its creditors, which may include vendors/suppliers or financiers. The ratio is often calculated regularly or annually and illustrates how successfully the company manages its cash outflows.

A company with a higher DPO value takes longer to pay its bills, which means it can keep available cash for a longer period, allowing it to use those assets more effectively to optimise the benefits. Conversely, a high DPO may also be a red flag indicating an unwillingness to pay debts on time.

On the other hand, a shorter DPO value could mean that the company has not effectively negotiated payment terms with their suppliers.

Benefits Of Calculating Accounts Payable Days

Here are some key benefits of calculating accounts payable days:

  • Paying your invoices on time will undoubtedly keep your suppliers happy, and it's an excellent basis for building trust and improving supplier relations.
  • A low DPO means that your company is paying their suppliers back too quickly and could be losing out on investment opportunities due to limited cash flows.
  • If your accounts payable days number is exceptionally high consistently or increasing from month to month, it could indicate a problem with your cash flows or AP processes. 
  • Understanding how long it takes to pay your suppliers will help you build better budgeting plans and gain control over your AP process.

Hence, AP days are an excellent tool for identifying potential drawbacks in the AP process and optimising invoice processing.

How To Calculate Accounts Payable Days? 

To calculate accounts payable days, you need to first calculate the accounts payable turnover:

Total supplier purchases((Beginning accounts payable + Closing accounts payable) 2))

The number of accounts payable days is then calculated by dividing 365 days by the resulting value. 

Alternatively, the accounts payable days formula can also be: 

(Average accounts payable Total cost of sold goods)  365 Days

Example of Calculating Accounts Payable Days

To understand this, consider the following accounts payable days calculation example:

The financial analyst at XYZ wants to perform the accounts payable days calculation for the previous fiscal year. The starting accounts payable balance was Rs. 400,000, and by the end of the year, it increased to Rs. 600,000. During the year, the total sales were Rs. 3,000,000. 

Using this information, the financial analyst calculates the accounts payable turnover as follows:

3,000,000 ÷ ((400,000 + 600,000) ÷ 2)

Accounts payable turnover = 6

To convert this into accounts payable days, the analyst divides 365 days by the turnover ratio:

365 days ÷ 6 = 60.8 days

Therefore, the average collection period for XYZ accounts payable was approximately 60 days during the previous fiscal year.

What Do Higher Accounts Payable Days Value Indicate?

A higher number of accounts payable days indicates that your company takes longer to pay its debts. This can be due to multiple reasons, including a lack of cash flow to pay bills on time or because suppliers have offered you more attractive payment terms. 

There are various benefits to having higher accounts payable days, the most important of which is having more cash available for short-term investments or enhancing working capital. Investors prefer organisations with higher accounts payable days because it indicates better cash management.

However, one important disadvantage of higher accounts payable days is that the company may lose any early payment discounts to which they may be entitled.

What Do Lower Accounts Payable Days Value Indicate?

A lower number of accounts payable days indicates that your company pays its vendors and suppliers on time. Low accounts payable days can be useful sometimes, particularly when negotiating payment terms with new suppliers or obtaining supplier or vendor discounts.

However, investors perceive low accounts payable days negatively as they could believe that the company is a high credit risk and hence does not get longer payment terms. Besides, paying debts too soon might also drain cash flows, preventing an enterprise from making short-term investments or reinvesting for business growth.

In many cases, figuring out how often to pay each seller or supplier based on the payment terms is helpful. Businesses may typically pay some vendors early to take advantage of early payment discounts while negotiating to secure better credit conditions.

How To Reduce Your Accounts Payable Days?

Here are a few solutions on how to reduce an enterprise’s AP days:

  • Balance the cash outflows and inflows: Review your suppliers and payment arrangements. For example, if your payment terms are 90 days and your suppliers’ payment terms are 30 days, you will almost certainly have an imbalance. You can improve this by adjusting your payment terms to match your suppliers’.
  • Optimise accounts payable workflows: AP automation can help you reduce AP days. It reduces invoice processing time, saves money, and eliminates invoice errors, cutting down your AP days.

Best Practices for Managing Accounts Payable Days

Companies should regularly monitor accounts payable and keep track of their outstanding payments to streamline operations. Here are some best practices or strategies that will help you effectively manage your business’s AP days:

  • Standardising payment terms: Payment terms mismatch between supplier offers and organisation acceptance causes payment inefficiency. This can be easily managed by standardising payment terms with the suppliers, streamlining communication, and optimising payment processes.
  • Collaborating with suppliers: Miscommunication strains your relationships with suppliers, undermines their confidence in you, and makes them reluctant to extend credit. Therefore, companies should communicate with suppliers about possible payment delays and negotiate new payment terms in advance. 
  • Forecasting and planning: Mining past data and analysing trends to accurately predict future purchases and the state of working cash helps avoid mistakes such as improper data entry and missing data. It also helps businesses come up with more informed strategic business planning.

How Do Accounts Payable Days Impact Cash Flows?

The accounts payable days are an important part of a company’s management and impact its cash flows in various ways, including:  

  • Having longer accounts payable days means that the company is taking longer to settle its liabilities, freeing up the cash in hand. This allows the company to use the excess cash flow for more important tasks.
  • Longer accounts payable days gives the company more cash on hand to meet unforeseen expenses, capitalise on business opportunities, or withstand economic crises without incurring cash shortages.
  • Extending accounts payable days also improves the cash flow of a company by eliminating the need to rely on other sources of finance or credit facilities to meet short-term obligations.

How To Optimise Accounts Payable With Automation?

Accounts payable automation solutions help optimise procedures, decrease manual data entry, and assure timely payments. Here are some ways that you can leverage automation to optimise accounts payable:

  • You can use automated solutions to comprehensively view your AP metrics, allowing finance leaders to make more informed decisions about vendors and credit terms.
  • With automation, you can also rest certain that your suppliers will be paid on time, and your business can avoid penalties and facilitate better vendor relationships.
  • Automating the ordering process and delivery tracking will help you prioritise more important tasks as well as get real-time shipment updates.
  • Automation can also help you streamline your payment schedules, track payments and create reports.

Common Mistakes to Avoid

Common mistakes to avoid while managing accounts payable days include the following:

  • Late payments that harm vendor relationships 
  • Neglecting to take advantage of early payment discounts
  • Relying on inefficient manual processes instead of automation 
  • Overlooking discrepancies in invoices
  • Inadequate record-keeping leading to audit problems
  • Ignoring the impact of AP on cash flow and 
  • Failing to periodically review and update AP policies for efficiency and compliance.

Frequently Asked Questions

What are the differences between DPO and DSO?

Days payable outstanding (DPO) is the average time a business takes to pay its vendors. In contrast, days sales outstanding (DSO) is the average time for customers to pay back their dues.

What is the average number of days payable?

The average number of days payable outstanding can vary between 30 and 90 days, depending on how well the business has negotiated its payment terms.

Are 30-day payment terms a rule? 

Accounts payable are often due within 30 days and are recorded on the company's balance sheet as a short-term obligation — current liabilities.

About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

Index

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption