Average days payable ratio
The average days payable ratio measures the average number of days it takes for a company to pay its suppliers. The majority of companies aim for a relatively short average days payable ratio as this indicates that they are able to meet their financial obligations toward their suppliers. If the ratio increases, it could be an indication that the company is having difficulty paying its bills.
Your average days payable should not be too high or too low. A ratio that is too high indicates that your business is paying suppliers beyond the accepted collections periods, meaning that you are paying interest on your purchases, which in turn could affect your business’s credit rating. If your average days payable is too low, this indicates that your business is not taking advantage of your suppliers’ payment terms and that you are unable to take full advantage of their purchase credit.
Calculate and compare the average days payable ratio
(days in the period) X (average accounts payable)
purchases on credit