How to Calculate Accounts Payable Days
- 09 Jun 2022
- AP Automation
The old saying about time being money holds true. For that reason, it is crucial to learn how to calculate accounts payable days. The time it takes to pay an invoice is critical to both suppliers and stakeholders. Streamlining operations reduces inefficiencies, and the time it takes to pay invoices.
Timely payments ensure uninterrupted production and support strong supplier relationships. Additionally, staying on or ahead of schedule protects your brand reputation. Consider the most efficient way to calculate accounts payable days to improve how fast invoices get paid and realize possible savings for early payments.
What are accounts payable days?
Accounts payable days are also referred to as days payable outstanding (DPO), a financial ratio that reveals the average number of days of credit the organization has to pay invoices and suppliers. The accounts payable days show the number of days it takes an organization to pay suppliers.
Understanding the DPO reflects current AP workflows, showing where improvements should be made. For example, late payments can lead to costly fees and penalties and damage supplier relationships. Determining where to improve efficiencies ensures timely payments and helps the organization save money.
Why do you need to calculate accounts payable days?
Calculating accounts payable days helps management determine how long it takes to pay suppliers and keep track of cash flow. With that in mind, a high DPO shows a company takes longer to pay back its suppliers. Then it is crucial to determine the reason it takes so much time. For example, is the organization maintaining cash for a more extended period for potential investments? Or, conversely, is the company struggling to repay its suppliers, causing a liability?
A low DPO indicates the business pays back suppliers faster than usual. Thus, early payments can impede cash flow that could otherwise be used for investments. However, a low DPO can also show the company is taking advantage of money-saving discounts for early payments and nurturing strong supplier relationships for improved production times. Either way, management must continually gauge AP workflows to determine the reasons for a high or low DPO. AP automation provides financial data in real-time for instant analysis of the full process AP cycle.
What is the formula for accounts payable days?
Like other accounting and financial processes, there is a formula to calculate accounts payable days. In basic terms, the formula is Days Payable Outstanding = Accounts Payable/(Cost of Sales/Number of Days). To sum it up, the formula to determine accounts payable days is to add all purchases from suppliers during the measuring time period and then divide by the average number of accounts payable during that time.
Beyond the formula, other considerations include excluding cash payments to suppliers and including only credit purchases to ensure the AP days are high enough. In addition, AP automation simplifies the process by making pertinent financial data instantly available for analysis and processing.
How do you calculate accounts payable turnover in days?
To dig deeper into the calculations, accounts payable turnover in days shows the average number of days a payable remains unpaid. In other words, what is the average time it takes for your company to pay a typical invoice?
To calculate the accounts payable turnover in days, divide 365 days by the payable turnover ratio. Understanding the time it takes to pay suppliers also helps indicate the creditworthiness of an organization - and make the necessary improvements to improve cash flow and creditworthiness.
Automation makes calculations and timely payments easier
Learning how to calculate accounts payable days is just the beginning. Once the organization understands its payment patterns, improvements can be made based on current cash flow and production needs. Continued evaluation is critical to staying productive and profitable in a constantly changing global marketplace. AP automation provides a secure and collaborative environment to share financial data in real time and make time-sensitive decisions when they matter most.
Also, keeping track of AP benchmarks helps determine how well your AP department functions, cash flow, and overall supplier satisfaction. With AP automation, the team can collaborate anytime and from any location to make important decisions to support continued production and improve brand reputation. Anything less can lead to late payments, interrupted production, and brand damage.
Understanding how to calculate accounts payable days is crucial to the overall success of an organization. Learn more about AP automation and how it supports timely invoice payments and strong supplier relationships - helping organizations improve cash flow and boost the bottom line.
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