Accounts Payable Days
The term accounts payable days refers to a calculation that allows an investor-analyst to understand the average time it takes a company to pay its accounts payable balance. This metric is useful when trying to determine if a company can quickly pay for its purchases.
Accounts Payable Days = Accounts Payable / Average Daily Purchases
- Average daily purchases is found by taking the total annualized purchases divided by 365. This provides a daily calendar rate (not business day rate). In this case, purchases would be equal to the company’s total expenses less payroll expense and depreciation.
Liquidity measures allow the investor-analyst to understand the company’s long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand how quickly a company is paying their bills is by calculating their accounts payable days.
Fast payments (low day values) are typically indicative of sufficient cash flow and / or companies taking advantage of discounts offered by its vendors. While the value can be tracked over time to understand if the company’s financial position is changing, the accounts payable days is also a useful benchmark to understand a company’s position relative to its competitors.
The manager of a large mutual fund would like to assess the ability of Company ABC to pay its bills. He believes this measure would provide a good understanding of the company’s cash flow strength. He asked his analytical team to calculate this value based on Company ABC’s most recent SEC filing. The following information was taken from the company’s 10-K. Accounts payable at the beginning of the period was $7,575,000, while its ending balance was $7,430,000. Total expenses in the same timeframe were $325,419,000, including payroll expenses of $175,322,000 and depreciation of $64,951,000. Using this information to calculate the accounts payable days:
= (($7,575,000 + $7,430,000) /2) / (($325,419,000 – $175,322,000 – $64,951,000) / 365)= ($15,005,000 / 2) / ($85,146,000 / 365)= $7,502,500 / $233,277, or 32.2 days
Since the value of 32.2 days is very close to 30 days, the mutual fund manager concluded Company ABC was not only paying bills quickly, but taking advantage of vendor discounts too.