Payable days on hand, also known as accounts payable turnover, is used by analysts to help understand the cash conversion cycle for a company. This is the amount of time it takes from the time you purchase inventory to the time you receive cash to the sale of goods and services. Specifically, accounts payable helps to determine the average number of days it takes for a business to pay it's obligations. The calculation to compute days payable outstanding (DPO) is the average accounts payable balance divided by the cost of goods sold per day.
Obtain the balance sheet for the company. This can be found in the annual report which can be downloaded from the company's website or requested from Investor Relations.
Determine the beginning and ending accounts payable balance. Annual reports contain at least two years of information. Use the previous year as the beginning balance for accounts payable and the most recent year as the ending balance. For instance, if accounts payable for Year 1 is $5,000 and accounts payable for Year 2 is $10,000. The beginning account balance is $5,000 and the ending account balance is $10,000.
Find the average accounts payable balance by summing the two years and dividing by two. For instance, in this example $5,000 plus $10,000 is $15,000. $15,000 divided by 2 is $7,500.
Determine the cost of goods sold. You can find this information on the income statement which is also found in the annual report. Let's say the CGS is $25,000.
Divide the CGS by 365. The answer for this example is $20,000 divided by 365 or 54.79.
Calculate the days payable outstanding by dividing the answer to Step 5 by average payable days. The calculation is $7,500 divided by 54.79 or 136.88. The average number of days it takes this company to pay its credits is 137 days.
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