Accounts Payable Days is an accounting concept related to Accounts Payable. It is the length of time it takes to clear all outstanding Accounts Payable. This concept is useful for determining how efficient the company is at clearing whatever short-term account obligations it may have.
Accounts Payable days Formula
The formula for calculating Accounts Payable Days is:
- (Accounts Payable / Cost of Goods Sold) x Number of Days In Year
For the purpose of this calculation, it is usually assumed that there are 360 days in the year (4 quarters of 90 days). Accounts Payable Days is often found on a financial statement projection model.
Accounts Payable Days in Finance
This metric can be used to assess the cash flow of the business in comparison to other businesses within the industry. The following example illustrates how accounts payable days can impact cashflows.
Accounts Payable Days Example
For this example Companies A and B are both in the same industry. Company A has $3,500 in accounts payable and has sold $42,000 worth of goods. Company B has 3,000 in accounts payable and has also sold $40,000 worth of goods.
- (3,500/42,000) x 365 = 30.4 or 30 days
- (3,000/40,000) x 365 = 27.3 or 27 days
Company A has the a higher number of days payable outstanding. They pay accounts approximately 30 days after billing and Company B pays about 27 days after billing. Company A is able to hold onto its cash longer. This cash can be used for short term investments or to increase working capital. Next, let's say that Company A is the industry standard. Consequently, Company B might consider extending their payment periods to increase cash-flow ceteris paribus.
- Accounts Payable (AP)
- Accounts Receivable (AR)
- Accounts Receivable Days
- Balance Sheet (BS)
- Financial Statements