ACCOUNTS PAYABLE DAYS

Description: A calculation of the days of accounts payable gives an outside observer a fair indication of a company's ability to pay its bills on time. If the accounts payable days are inordinately long, this is probably a sign that the company does not have sufficient cash flow to pay its bills and may find itself out of business in short order. Alternatively, a small number of accounts payable days indicates that a company is either taking advantage of early payment discounts or is simply paying its bills earlier than it has to.

Formula: Divide total annualized purchases by 365 days, and then divide the result into the ending accounts payable balance. An alternative approach is to use the average accounts payable for the reporting period because the ending figure may be disproportionately high or low. The amount of purchases should be derived from all nonpayroll expenses incurred during the year (payroll is not included because it is not a part of the accounts payable listed in the numerator). Also, depreciation and amortization should be excluded from the purchases figure since they do not involve cash payments. The formula is: