What is Accounts Payable Days and How To Calculate It?

What is Accounts Payable Days?  

Account Payable Days, also known as Days Payable Outstanding (DPO), is the average number of days it takes a company to pay back its suppliers for goods or services provided. Many businesses rely on these delayed payments to sustain operations or grow the business.

Example:  

Company A has Days Payable Outstanding (DPO) of 15 days, while company B’s DPO is 20 days.

What It Means:  

Company A takes 15 days (on average) to pay back its suppliers, while company B takes 20 days.  

Account Payable Days (AP Days) is a crucial metric to track because the speed of payments can tell us a lot about a company’s cash flow management and its financial health. A company’s DPO can affect:

• Liquidity: Payment flexibility allows businesses to hold onto cash for longer, allowing them to allocate funds to more immediate needs or investment opportunities.    
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• Supplier Relationships: Paying too late may cause tension and weaken supplier trust. Meanwhile, paying too early limits available cash and movement.
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• Operational Strategy: Some businesses intentionally delay payments to pay for operating expenses such as buying inventory, rent, payroll and more.  

Striking a balance between how early or late repayment occurs is crucial. Here’s why:

A short DPO means payments are being made early. This may be good for supplier relationships but limits available cash for the business.  

A high DPO means payments are being made later, allowing businesses to hold onto cash longer. However, excessive delays can cause strain in supplier relationships and lead to other negative consequences.

Why should you care about Accounts Payable Days?  

Accounts Payable Days is more than just a number – it reflects a company’s ability to manage cash flow efficiently.  

By tracking this metric, businesses can gain crucial insights into their cash management, strengthen supplier relationships and improve operational efficiency.

That’s why many businesses of all sizes are automating KPI tracking. With Fathom’s management reporting software, you’ll gain access to key metrics like Accounts Payable Days and more – helping your business stay on top of everything with ease.  

For more information, check out our article on What is Management Reporting Software and view our Sample Management Reports to see how it's done.

How to use the AP Days formula  

As outlined by Wallstreet Prep, use the formula below to calculate your company’s Accounts Payable Days:

Accounts Payable Days = Accounts Payable * Number of Days / Cost of Sales   

What do each of these components mean?

• Accounts Payable is the amount owed to suppliers during a specific period.  
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• Cost of Sales is the direct cost of producing the services your company sells. These costs may include raw materials, electricity, and manual labour.  
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• Number of days refers to the length of time for which you need to know the result. AP Days are often calculated monthly, but this can also be quarterly or annually.

Example of AP Days Calculation  

Let's look at an example to understand how AP Days are calculated. Company A has the following:  

• Accounts Payable: $70,000/2 = $35,000
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• Cost of Sales: $400,000  
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• Number of Days: 365 (for annual analysis)  

Example of AP Days Calculation:

Using the Accounts Payable Days formula, company A takes 32 days (on average) to pay its suppliers what is owed.  

What does DPO tell you?  

A DPO is a metric that measures the average number of days to pay accounts payable – or how many days a company takes to pay its suppliers. Analysing this metric clearly shows a company's payment practices and cash flow management.  

High DPO  

A high Days Payable Outstanding (DPO) is when a company takes longer to settle its invoices. In cases where your DPO is unintentionally high, this can be a sign that your business is struggling with liquidity. While a high DPO can work to your advantage, when overdone, it can cause some setbacks to your business.  

Having a high DPO means having more cash available, directly improving your company’s cash flow, enhancing liquidity, and giving greater financial control. In turn, companies can maintain stability and still have the resources to grow.  

However, excessive delayed payments risk straining supplier relationships and could also lead to higher costs of credit, stricter payment terms, or, worse, hesitation to continue the business partnership.  

Low DPO  

A low DPO means payments are being made quickly and is often a sign of financial stability. The pros of a low DPO include establishing trust with suppliers, a better financial reputation, and helping companies avoid late fees and penalties.  

On the flip side, paying too quickly also has some drawbacks. A low DPO could also cause a company to miss out on efficiently using working capital to fuel further growth.  

How to evaluate Accounts Payable Days  

When it comes to evaluating Accounts Payable Days (DPO), companies should consider comparing against industry benchmarks, analyszing historical trends, and assessing how well it aligns with their financial strategy.  

Firstly, industry comparison is an essential first step. This is because different industries simply have different AP Days standards. For example, a manufacturing business's AP Days is typically much higher than retail due to longer production cycles and bulk orders. In contrast, retailers tend to operate on shorter payment cycles with a faster inventory turnover.  

Secondly, consider the size of your business and supplier terms. Larger companies often have more leverage, allowing them to negotiate longer payment terms. Unfortunately, smaller businesses may not get the same luxury. In contrast, they may have to comply with stricter terms and shorter payment deadlines due to lower purchasing power.  

Lastly, to evaluate a company's Account Payable Days, you should also take a look at cash flow and liquidity needs. Long-term success for any business is only achievable with a sustainable plan. Therefore, a company should strive for a good balance between supplier payments and maintaining cash reserves.  

In short, a company should consistently monitor its DPO as it ensures financial stability, maintains good supplier relationships, and helps with effective business operations.

Benchmarks in Accounts Payable Days  

Accounts Payable Days (AP Days) is benchmarked differently across different industries. As highlighted by HighRadius, companies must compare their figures against respective industry norms as there is no ideal DPO that applies to all businesses. In general, it is best to stay within a reasonable range in order to maintain healthy cash flow management. For example:

• Retail: Due to fast-moving inventory and frequent payments to suppliers, an average of 20-40 AP Days is more common in this industry.
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• Manufacturing: Bulk purchasing and supplier agreements in manufacturing tend to lead to longer cycles. An average of 50-60 AP Days is typical for this line of work.
   
• Technology: In tech, AP Days can range from 60-90 days as companies are more likely to negotiate payment extensions to manage capital.

Despite all this, do note that a company’s AP Days will vary based on the size of the company, market conditions and its business practices. This emphasizes the importance of evaluating a company's DPO to stay competitive and maintain financial stability.  

Fathom offers innovative, user-friendly tools to help you track Accounts Payable Days (AP Days), along with a precise benchmark that’s tailored to your industry. With a built-in benchmarking capability, compare your business against bespoke targets and gain valuable insights into payment cycles.

Discover how Fathom's Management Reporting Software can do heavy lifting and support you in making better financial decisions.  

Impact of Accounts Payable Days  

How might Accounts Payable Days impact a business? This metric affects multiple aspects of a business. Let’s explore this in more detail:

Cash flow assessment

When assessing cash flow, Accounts Payable Days is a key metric to consider as it reflects how long a business is holding onto cash before settling payments.  

• Higher AP Days indicates that a company is delaying supplier payments and holding onto cash for longer. This could be used to make other payments such as payroll, inventory and operational expenses.
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•  Lower AP Days shows a company is making payments quickly, but there is limited cash available for investment or growth opportunities.  

If a company’s AP Days is excessively high, this could lead to supplier frustration, stricter payment terms or even supply disruptions.

Ultimately, it is best to aim for a well-balanced Accounts Payable Days to maintain supplier relationships and long-term financial stability.  

Maintaining supplier relationships  

Supplier relationships play a big part in a company’s long-term stability. Some suppliers are more accommodating and flexible, while others prefer faster payments.  

Here are some things to consider when managing suppliers:

• Fast or timely payments are great for building that initial trust, strengthens relationships which can lead to better payment terms, discounts and even priority access to inventory.
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•  On the other hand, consistent late payments can have negative consequences such as strained relationships, stricter payment terms, or suppliers may ask for upfront payments.

In the end, it’s all about balance. Payments that are delayed for too long or too frequently may result in straining relationships. On the other hand, paying too early will limit available cash.  

Ideally, a company’s AP Days is one that protects supplier relationships and can maintain its financial control.  

Efficient management of capital  

Accounts Payable Days can significantly affect how capital is being managed. Here’s how:

• Cash flow control – The timing of payments determines how long a company can hold onto cash before it leaves the business. Higher AP Days allow businesses to hold onto cash for longer, improving cash flow and profitability.
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•  Financial flexibility – Higher AP Days helps business hold onto more cash that can be used for operations, investments, or unexpected costs, improving liquidity.
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• Supplier relationships – Paying on time can build trust and lead to better payment terms, while excessive delays may result in stricter terms or disrupt partnerships.  

Finding the right balance helps businesses manage working capital effectively, maintain financial stability, and support long-term growth while meeting financial commitments.  

Improved financial analysis  

Accounts Payable Days can give businesses a clearer view of their cash flow, working capital and overall financial state.  

Here are some ways tracking days in payable outstanding can improve financial analysis:  

• Monitor Payment Patterns – Keeping track of AP Days helps to reveal patterns and habits. With this insight, businesses are able to assess whether payments are being managed well or causing financial issues.
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• Assess Cash Flow – AP Days helps businesses manage working capital by balancing payment timing. Timing cash inflows and outflows helps improves financial stability and lessens disruptions.  
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• Identifies Financial Risks – Sudden changes or inconsistencies with a company’s AP Days can signal cash shortages or inefficiencies in the payment cycle, which would otherwise go undetected.  
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• Supports Competitive Benchmarking – While there are no ideal AP Days, it’s still crucial for businesses to compare theirs against industry standards. This is to ensure the company’s financial health is healthy, especially when compared against competitors.  

In summary, regularly analysing DPO trends helps businesses make informed financial decisions. These include cash flow allocation, supplier relations, working capital management, and long-term financial growth.

Strategic decision making  

Accounts Payable Days is a key metric that helps businesses make informed decisions about cash flow, supplier payments, and long-term financial planning.  

By tracking Accounts Payable Days, companies can identify risks early, adjust payment strategies, and strengthen financial stability.  

Thanks to these valuable insights, businesses can eventually develop strategies suited to their financial needs, ensuring effective payment management and long-term stability.  

Days Payable Outstanding and the Cash Conversion Cycle  

Cash Conversion Cycle (CCC) estimates the approximate number of days it takes a company to convert inventory into cash after a sale to a customer – as defined by Wallstreet Prep. Account Payable Days (DPO) is an important component of the Cash Conversion Cycle (CCC).  

Below is the formula to calculate the cash conversion cycle of a company:  

Cash Conversion Cycle = Inventory Days + Accounts Receivable Days + Work in Progress Days - Accounts Payable Days

• Inventory Days: This measures the days, on average, a company takes to sell its inventory.  
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• Days Sales Outstanding (DSO): This indicates the average number of days it takes a company to collect payment from customers after a sale.
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• Days Payable Outstanding (DPO): This reflects the average number of days a company takes to pay its suppliers.

So, how do DPO and CCC correlate?  

• A higher DPO shortens the CCC, which means the company holds onto cash longer before making payments but can convert inventory into cash more quickly. This improves liquidity and provides financial flexibility.  
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• A lower DPO lengthens the CCC. This means suppliers are paid quickly but reduces available cash, potentially limiting liquidity.  

In short, balancing accounts payable days is crucial as it can affect various parts of your business. Companies must assess their CCC carefully to ensure financial stability and smooth supply chains.

Optimising working capital for both buyers and suppliers  

Managing working capital effectively can make all the difference for both buyers and suppliers. Here’s how:

For buyers: It can boost financial flexibility, strengthen supplier relationships and ensure smooth operations.

For suppliers: Expect predictable cash inflows, less delayed payments, stronger relationships with buyers and more business in the future.

Here are some strategies to improve the management of working capital:

• Align timing of payments with cash flow – Match the movements of cash with company spendings to avoid any shortages or financial strains.  
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• Negotiate better terms – Agree on more flexible payment arrangements for the company’s benefit, without jeopardising supplier relationships.
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• Improve payment processes – Automate workflows, standardisze approvals and ensure timely invoice processing to reduce inefficiencies.  

Check out this article by Corcentric to learn more about working capital management.

How to reduce your AP Days  

Reducing days of account payables can help businesses strengthen supplier relationships, build a reputable name, and capitalize on early payment discounts. As mentioned by Tipalti, here are some ways AP Days can be reduced:  

Balance the Cash Outflows and Cash Inflows  

Align the timing of cash outflows and inflows to maintain stable cash flow and avoid shortages. You may consider:  

• Forecasting payments to prevent any delays.  
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• Prioritising payments based on urgency and business impact.  
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• Negotiating better terms with suppliers.  

Optimise Accounts Payable workflows  

A complicated or inefficient process can also lead to delayed payments and breakdowns. Stay on top of payments by:  

• Standardising AP procedures to avoid errors or redundancies.  
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• Centralising payment tracking for better visibility and control.

Using automation to speed up your AP Process  

In this fast-changing world, automation makes all the difference in your AP process. Below are tasks you can automate to reduce days of accounts payable:  

• Record Management: Automate all outgoing and incoming payments and save invoices.  
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• Scheduled Payments: Avoid missed or delayed payments by scheduling upcoming payments in advance.  
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• Fraud Detection: Detect and prevent fraud by implementing processes and setting up systems. This ensures the company does not pay false invoices.
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• Optimise Your AP Process: Automation quickly brings to light any inefficiencies and provides reports to improve accounts payable processes.  

Final thoughts  

In summary, Account Payable Days is a crucial figure to track in order for any business to thrive.  By tracking and observing AP Days, businesses can make informed decisions that affect cash flow management and financial health.

Fathom automatically calculates comprehensive financial KPIs, including your Accounts Payable Days. Check out the list of default KPIs or visit our help center to discover more. If you’re new to Fathom, visit the Fathom blog to explore tutorial webinars and testimonials to see how other businesses have benefitted from using Fathom.  

Interested in our management reporting software?  

Management Reporting Software gives businesses a clearer view of their financial health by monitoring and analyzing important metrics like Accounts Payable Days, cash flow management, and payment trends.

With powerful visual reporting and financial analysis tools, businesses can confidently monitor their performance and make data-driven decisions.