Days payable

Days payable
See also

Days payable is an indicator showing the number of days it takes a company to pay its suppliers on an average. It gives a good idea on how a company is dealing with its current liabilities. In order to calculate days payable we need to take the number of days in accounting period and divide it by the payable turnover[1].

Payable turnover

In order to measure days payable we need to first obtain the payable turnover. Payable turnover is basically an average number of times that a company is paying its accounts payable during an accounting period. It shows credit terms extended to a company. To calculate it, first we need to adjust cost of goods sold by the change in inventory - this will give us the value of the purchases. The next step is to divide purchases by the average accounts payable value. The result is the payable turnover number[2][3].

Days payable calculation

Lets suppose we are running an advertising company. To obtain our days payable there are two steps that need to be taken[4]:

  • first we need to calculate our payable turnover value as follows.

\(Payable\ turnover\ =\ \frac{Cost\ of\ goods\ sold\ ±\ Change\ in\ inventory}{Average\ accounts\ payable}\)

\(Payable\ turnover\ =\ \frac{21,750.00-95.00}{ \left( 2,750.00+3,187.00 \right)÷2}=\frac{21,655.00}{2,968.50}=\ 7.3\ times\)

  • Once we have the payable turnover we can start calculating days payable.

\(Days\ payable\ =\ \frac{Days\ in\ accounting\ period}{Payable\ turnover}\)

\(Days\ payable\ =\ \frac{365\ Days}{7.3}=50\ Days\)

Analysis and interpretation

The Payout turnover equal to 7.3 times and Days payable of 50 days are both saying that the credit terms our company's receives from its suppliers is rather good. Our company's suppliers are waiting quite a long time to be paid and we have more time to use the cash. It is crucial for the company to asses that number with the number of days it takes to collect its receivables. If the time we collect our receivables is higher we can have difficulties with cash flow thus running the operations. The other thing we need to take under consideration is our suppliers' satisfaction. Higher days payable means better position with cash, but also less happy vendors. This can result in damaging our reputation in the eyes of other top suppliers thus discourage them from making business with our company. It can display for example in prices being a little higher or terms slightly stiffer. The complete opposite can be expected by a company with swift-payment reputation. To sum up, the desire of having more time for using the cash needs to be balanced in every company with a need to keep its vendors happy and maintain good relationships with them[5].

References

  • Berman K., Knight J., Case J., (2013), Financial intelligence, Business Literacy Institute, Inc., United States of America
  • Crosson S. V., Needles Jr. B. E., (2014), Managerial accounting, South Western Cengage Learning, United States of America
  • Needles Jr. B. E., Powers M., Crosson S. V., (2011), Principles of accounting, South Western Cengage Learning, United States of America

Footnotes

  1. Crosson S. V., Needles Jr. B. E., (2014), p. 549
  2. Needles Jr. B. E., Powers M., Crosson S. V., (2011), p. 432-433
  3. Crosson S. V., Needles Jr. B. E., (2014), p. 548
  4. Needles Jr. B. E., Powers M., Crosson S. V., (2011), p. 432-433
  5. Berman K., Knight J., Case J., (2013), p. 182

Author: Kamil Juszczuk