Just as careful asset management helps conserve and generate cash, careful management of your payables helps you to build good relations with suppliers, take advantage of payment discounts when offered, and at the same time avoid paying your bills more quickly than you collect your own receivables. Accounts payable payment days is the principal measure of how quickly you pay your bills. It is the ratio of total payables to total expenses.
Thus, A/P payment days is a measure of how many days it takes you, on average, to pay your bills.
Total payables are averaged over the preceding months of your fiscal year, while expenses are annualized based on the total for the current year.
In general, careful matching of receivables and payables means that you should try to pay your bills in the same amount of time that your customers pay you. This way, you will generally have enough cash on hand to pay your suppliers. If possible, you can even try to pay your bills a little slower, although not so slowly as to jeopardize your credit standing.
You should also note that if your expenses consist in large part of payroll expenses, you have little control over when they can be paid.
Who's Watching:
Credit agencies look closely at how quickly you pay your suppliers, and this is a key measure of your credit standing. A low average payment time helps to make you a good credit risk, while a high payment time can work against you.
Your banker and other lenders are also watching. As your accounts payable payment days ratio improves, i.e., gets smaller, it indicates that your financial health is improving. When this number gets larger, on the other hand, it may indicate that you are facing some kind of financial difficulty.
Business Factors:
Accounts payable payment days is affected mostly by how quickly you pay your bills. While most suppliers would like you to pay promptly, you should be careful to pay bills only when they are due (or when the discount can be taken) and not to pay too quickly. Paying quickly uses up cash that could be invested elsewhere.
