How to Use Financial Reports to Calculate the Number of Days in Accounts Payable
The number of days in accounts payable ratio lets financial report readers see the average length of time a company takes to pay its bills. If a company is taking longer to pay its bills each year, or if it pays its bills over a longer time period than other companies in its industry, it may be having a cash-flow problem.
Similarly, if a company pays its bills slower than other companies in the same industry, that could be a problem, too.
How to calculate the ratio
Use the following formula to calculate the number of days in accounts payable:
Average accounts payable ÷ Cost of goods sold × 360 days = Days in accounts payable
Note: The industry uses 360 days rather than a full year’s 365 to make this calculation based on an average 30-day month (30 × 12 = 360).
You can use Mattel’s and Hasbro’s balance sheets and income statements to find the number of days in accounts payable ratio. You don’t have to calculate average accounts payable because you already did so if you calculated the accounts payable turnover ratio.
$360,187,000 (Average accounts payable) ÷$3,011,684,000 (Cost of goods sold) ×360 = 43.1 days
Mattel takes about 43.1 days to pay its bills, or about 6.2 weeks, which is about 4 weeks less than it takes Mattel to collect from its customers — 10.02 weeks, as the accounts receivable turnover ratio shows.
Therefore, Mattel is receiving cash from its customers at a slower rate than it’s paying out in cash to its vendors and suppliers. This issue may be a factor in the need for short-term borrowings of $9,844 million, as the balance sheet shows.
$137,385,000 (Average accounts payable) ÷$1,671,980,000 (Cost of goods sold) × 360 = 29.6 days
Hasbro takes about 29.6 days, or 4.2 weeks, to pay its bills. Hasbro’s accounts receivable turnover ratio shows that its customers take slightly more than 13.12 weeks to pay their bills. Therefore, Hasbro must pay its bills more quickly than its customers pay theirs, which could cause a cash-flow problem.
What do the numbers mean?
If the number of days a company takes to pay its bills increases from year to year, it may be a red flag indicating a possible cash-flow problem. To know for certain what’s happening, compare the company with similar companies and the industry averages.
Just as accounts receivable prepares an aging schedule for customer accounts, companies prepare internal financial reports for accounts payable that show which companies they owe money to, the amount they owe, and the number of days for which they’ve owed that amount.