Days payable outstanding is one of the indicators of activity, which reflects how many days it takes us on average to settle our payables.
The indicator is well applicable during negotiating delivery terms with suppliers.
Trade payables are often the average from the beginning and final balance.
It is possible to use revenues instead cost of purchases (costs, however, are preferable since they do not include margin). Costs of purchases are not usually shown separately in the accounting records and thus need to be ascertained.
Comparison most often with
- indicator is most often compared with the usual delivery period
- advisable is the comparison with Receivables collection period, which should be lower than Days Payable Outstanding
- meaningful is the comparison over time
- generally, high values are desirable, which may indicate that the company is able to negotiate advantageous delivery terms (de facto supplier credit)
- however, too high values may worsen the relationship with suppliers, or even indicate potential problems with deliveries