Days Payable Outstanding

Accounts Payable refers to the sum of money due to be paid by a company. This may be due to existing trade credit or procurement of goods for the company. A company needs to monitor its Account Receivable as it is a source of Cash Outflow for the company.
  • Accounts Payable is indicated as a liability in the balance sheet of the company and is expected to be cleared within a year.
  • A large Accounts Payable is an indicator of high debt on the company which may create a negative impression and a bad credit history of the company in the market. A company with a bad credit history may not be able to get credit from the market which may affect the Cashflow of the company.

Days Payable Outstanding Formula

Number of Days of Payables = Average Accounts Payable
Average Day's Purchase
Average Day's Purchase = Purchases
365

Managing Accounts Payable

  • Centralization: An organization having a centralized structure of accounts payable has better control over the accounts payable as there are no multi-layer delays associated as in the case of decentralized organizations that have many layers and associated delays.
  • Timely Payments: Timely payments of the credit outstanding may benefit in the form of some discount in the total amount payable if allowed by the other party. However, it will certainly save from penalties on delayed payments.
  • Credit History: Timely clearing of Accounts Payable helps a company build a better credit history in the market that benefits the company in several ways.
  • Payment Terms: The company may choose a payment term that suits its cash flows. E.g. Monthly Billing is preferred by the companies that get their revenue in the same way.
  • Number of Days of Payables gives an idea of how fast a company pays off its dues. This is also known as Day’s Payable Outstanding or Average Days Payable. It helps the company to revise its payment policy if the value is too large a company may consider improving it.
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