"Days payables" is a term that is used to identify the average amount of days that it takes for a business to remit payments to vendors and suppliers. Determining this average amount is helpful in terms of evaluating how efficiently debt obligations are being honored. Taking the time to determine the days payables can help the accounting team isolate instances of excessive delays that lead to the imposition of late fees and other penalties, which in turn increase the cost of doing business.
The basic formula for determining days payables calls for dividing the current accounts payable by the cost of goods sold, then multiplying that figure by 365, representing the total number of days in the calendar year. For example, if the accounts payable for a small business is currently at $5,000 US dollars and the cost of goods sold as of that same date is $11,000 USD, this results in a figure of 0.45. Multiplying that figure by 365 provides an answer of 164.25. This means that on average, the small business is taking 164 calendar days to pay its debt obligations to creditors.
The goal with days payables is to find the balance between paying off debts in order to keep the application of interest and penalties within reasonable limits, while also hanging on to those funds long enough to generate some sort of interest as the money resides in some sort of interest-bearing account. In order to find this balance, it is important to identify which obligations can be scheduled for payment at a later date and incur only a minimum of interest charges on the balance. By creating a payment schedule that settles vendor debts which carry higher penalties and charges earlier in the process and paying those with lower or no interest charges for later, it is possible to generate the most overall benefit from those funds set aside to settle the payables.
While the days payables is more commonly calculated to reflect an annual average, it is also possible to alter the formula to accommodate a shorter time frame. It is not unusual for businesses to determine this average for a quarter rather than an entire year. This is particularly true when company owners and managers are attempting to structure the most beneficial payment schedule, given the current roster of outstanding debt to various suppliers and vendors. By setting specific goals for the days payables, it is possible to determine if the actual payment schedule is in compliance with those goals, or if some changes in the schedule are necessary in order to receive the best possible returns on the financial resources of the company.
