Accounts Payable Day Formula Definition:
To measure the amount of time that a specific company takes to pay its suppliers, accountants use the “accounts payable day formula” or “accounts payable turnover formula”. This information can be used to determine how well a company is able to utilize its working capital, which is a key indicator of its financial health.
The most common way to calculate this is to divide the Accounts Payable by the Cost of Sales, then multiply this by the number of Days.
Accounts Payable x Number of Days=Accounts Payable Days
Cost of Sales
Remember that the Accounts Payable quantity refers to the amount of money a company owes to its suppliers and the number of purchases made on credit. The Cost of Sales can also be known as the Cost of Goods Sold or Cost of Revenue.
Let’s look at how a potential investor in ABC company might use the Accounts Payable Days formula to determine if ABC is in good financial health.
ABC listed its Accounts Payable for this period as $3,247 and its Cost of Sales as $10,693 (both numbers are listed in millions). When you divide accounts payable by the cost of sales, we get .3037. This is the turnover ratio. To see this number in terms of days, you multiply it by 365. Your accounts payable days is 110.8, which means that it took an average of 111 days for ABC to pay its accounts/creditors in that year. This is seen as good news for investors, since the more time a company has to pay its creditors, the more time the money can spend generating interest in the bank.
“Day Sales Outstanding – DSO – Accounts Receivable Management.” Accounting Information, Tax Information and Information about Public Companies. N.p., n.d. Web. 22 Oct. 2012. http://www.accounting-information.net/accounting_information/financial_ratios/day_sales_outstanding.shtml
“Accounts Payable Days Formula – AccountingTools.” Accounting CPE & Books – AccountingTools. N.p., n.d. Web. 22 Oct. 2012. <http://www.accountingtools.com/accounts-payable-days-formula>.