Simply put, Days Payables Outstanding it’s the number of days worth of expenditures that you owe in the Accounts Payable balance at any point in time.
It’s mechanically calculated by taking your accounts payables and dividing it by the average expenditures per day.
For a manufacturing business, the “average expenditures per day” is usually calculated by taking the cost of goods sold for the last year and dividing by 365. Sometimes a shorter period is used, especially if things are changing rapidly.
For a service business, the total expenses are used, less salaries, payroll taxes, payroll related expenses (such as pensions) and then dividing that by the number of days … similar to what is done for a manufacturing facility.
Of what use is this number? Of and by itself, not much. As a comparative figure to industry averages, mildly interesting, perhaps indicating an abnormality. As a comparative figure to past periods ( horizontal analysis), it is very indicative of what’s happening in payables management. It’s a good figure to monitor.
If you can get it, a great measure of payables management is the “discounts lost” figure, which indicates how much in those “ 2–10, net 30” discounts for prompt payment the company missed. That figure is worth monitoring very carefully, as it will be a canary in the mine indicator of cash flow problems. Note that a sloppy or inadequate accounting system won’t show this number.
Remember that managing payables involves more than looking at gross numbers. One of the most useful tools is an A/P aging. It looks just like its A/R counterpart. Good A/P management involves a constant review of the aging.
At https://CEAnow.org we have a course which focusses on managing payables. There’s a lot more to it than just paying the bills as they come due. Major internal control problems can fester unseen beneath the surface in a poorly run A/P system. A good A/P system is at the forefront of the company’s defenses against fraud and theft.