How to Find Days Sales in Payables
Financial ratios express relationships between financial statement items. They are useful for evaluating a company's current performance against its historical performance, and for comparing it with that of its industry peers. Days sales in payables, also known as days accounts payable or account payable days, measure the number of days a company is taking to pay its suppliers. An increase in the number of days may indicate cash flow problems, while a decline may indicate demands for faster payments from suppliers.
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Instructions
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Calculate the average accounts payable for the period. This is equal to the average of the beginning and ending accounts payable balances in the liabilities section of the balance sheet. For example, if a company's beginning and ending accounts payable balances are $1 million and $1.6 million, respectively, the average accounts payable balance is half of ($1 million plus $1.6 million), or $1.3 million.
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Find the total purchases during the period. There is usually no separate line in the financial statements for purchases. However, you can derive the amount by adding the difference between the ending and beginning inventory balances to the cost of goods sold. The beginning inventory of the current period is the ending inventory of the prior period.
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Divide the purchases by the average accounts payable to get the accounts payable turnover. Continuing with the example, if the total purchases during a period are $8 million, the accounts payable turnover is $8 million divided by $1.3 million, or about 6.15.
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Divide 365 by the accounts payable turnover to calculate the days sales in payables. In the example, it is 365 divided by 6.15, or about 59 days.
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Tips & Warnings
According to the Financial Education and AccountingTools websites, you should assume that all purchases are credit purchases, because upfront cash payments are usually a small portion of purchases from suppliers.
