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Investment Dictionary


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Days Payable Outstanding

 

Days payable outstanding’ ratio shows how long it takes the company to pay its liabilities to the suppliers. The longer period means that company is not in a hurry to settle up its debts to the suppliers. Many companies are trying to delay the payments because they save some working capital in this way which lowers expenses for capital. Longer payable outstanding makes ‘cash conversion cycle’ less efficient.

 

However, delaying the payments may help for working capital management but will have a negative effect as well. All payments have two participating parts. That means if there is a company that has to pay, there is also a company that wants to receive the payment. If the company is consistently late to receive the payments from another company which tries to delay its payments, it may look for new clients that settle the accounts on better schedule. 

 

‘Days payable outstanding’ formula


Days payable outstanding = (Accounts payable / Cost of goods sold) * Number of days in period

 

* ‘Accounts payable’ are disclosed in company’s balance sheet while ‘cost of goods sold’ (also can be recognized as ‘COGS’ or ‘cost of sales’) is provided in income statement. Number of days depends on the period of ‘cost of goods sold’ from income statement, while accountants usually use 360 or 365 days period for annual data. 

 

 

 






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