Days Payable Outstanding for your Business Plan
A business which purchases on account from its suppliers will at any point in time have amounts owed to them for unpaid invoices. The amount outstanding is referred to as accounts payable, or sometimes as trade creditors.
If the value of the accounts payable is divided by the value of the average daily cost of sales, then the resulting figure is the number of days payable which are outstanding. Additionally this number is referred to as days payable outstanding, accounts payable days, or creditor days.
Days Payable Outstanding in the Financial Projections Template
The financial projections template uses the value of days payable outstanding to calculate the year end accounts payable based on the projected annual cost of sales for the year.
Additionally our free accounts payable days outstanding calculator calculates a value for inclusion in the financial projections template.
Established Business Plan
For an established business, the days payable outstanding can be calculated from the latest set of accounts. The figures to use are accounts payable from the balance sheet, and the cost of sales from the income statement.
To illustrate suppose the annual cost of sales is 90,000 and the accounts payable balance is 7,000. The calculation of days payable is as follows.
Accounts payable = 7,000 / (90,000 / 365) = 28.4 days
This means that on average it takes the business 28.4 days to pay its suppliers for on account purchases.
If the income statement is not for a full year, then divide the cost of sales for the period by the number of days in the period. This will give the average daily cost of sales over that period.
As a check, unless accounts payable payment procedures are not being adhered to, the payable days should be similar to the credit terms offered to the business by its suppliers.
Startup Business Plan
The days payable outstanding for your business will depend on the type of industry in which it operates. A predominantly cash based business will have a very low days payable outstanding, in the order of a few days. In contrast a manufacturing business might have accounts payable days in the region of 90 days or higher.
The figure to use for the accounts payable days is the average credit terms being offered by suppliers. This should normally reflect the industry averages. If industry averages cannot be found, then use the published accounts of similar businesses or competitors, and carry out the calculation described above for established businesses.
Ultimately, the value of days payable is the amount of credit your business is offered by suppliers. Consequently procedures need to be in place to ensure this is adhered to as part of the business plan. It is important to understand that a new startup business will usually not be given normal credit terms. Due to the inherent risk involved it might be expected to pay in cash until a trading history can be established.
Having entered the days payable, the template calculates the accounts payable at the end of each subsequent year. The calculation involves multiplying the days payable outstanding by the average daily cost of sales for the year.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to determine the other liabilities days outstanding for use in the projected balance sheets.
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on how to use our template to produce simple financial projections.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.