How to Calculate Accounts Payable Days (Formula & Example)
Last updated: December 13, 2022
| Written by: Petra Martinis
In one of our previous posts, we defined accounts payable as company’s short-term debt and obligations to vendors or suppliers for the goods and services bought on credit.
When you receive an invoice from your supplier you might not want to pay it right away, but with a delay of 30 or up to 90 days. And let’s imagine you have hundreds of those bills to manage.
It makes it challenging to plan monthly budgets, doesn’t it?
There is a simple formula that can helps calculate how many days on average it usually takes for a company to pay its suppliers. This metric can show you how good is your AP process and how fast your payments are.
We understand that as a CFO or financial controller, having efficient AP processes in place can help save your company’s money, as well as provide peace of mind and convenience when dealing with bills.
So read on, because in this blog post we will outline what is accounts payable days, how to calculate it with a simple formula, and why you should measure it in the first place.
What Is Accounts Payable Days?
Accounts payable days, also called Days Payable Outstanding (DPO), is a financial metric that can help you keep track of your company’s AP performance. DPO measures the average number of days the company takes to pay its bills.
If this number is high, that means it takes longer for the company to pay its suppliers. This delay can potentially harm the relationship with, or it can even lead to additional costs like penalties for overstepping due dates.
Vice-versa, a lower number means the invoices are paid faster and on time. Certainly, this builds trust and improves supplier relationships, and in some cases, it can lead to new opportunities like early discounts.
Knowing your DPO is important since it gives you insight into how efficient your business is at settling debts with its suppliers.
So how do you get to this number?
How To Calculate Accounts Payable Days?
Calculating DPO is easy if you break it down into a few individual components. The formula takes all purchases from suppliers during the specified time and divides them by the accounts payable turnover.
So to get DPO, first you have to know what is your accounts payable turnover.
Accounts payable turnover (APT) is a ratio of the total supplier purchases and the average amount of accounts payable. To calculate the average amount of accounts payable take the beginning balance of accounts payable, add the ending balance, and then divide that number by two.