What is the AP Days Calculation and How Can it Improve AP Workflows?
If an invoice is processed in a forest and there’s nobody around, does anybody hear about the payment?
Super-lame AP humor aside, do people really care exactly how fast an invoice gets paid?
Overwhelmingly yes. And not just vendors, either—internal stakeholders at your own organization care very much how long it takes to process an invoice. The AP days calculation is the measurement tool for this.
There are a few things at stake when it comes to your organization’s ability to process invoices in a timely manner.
The first is your company’s reputation—you don’t want to get a bad name in your industry or be known as the company who doesn’t pay on time. For obvious reasons.
Another reason is that you’ll start racking up late payment penalties if you make it a habit.
Lastly, the amount of time it takes you to pay an invoice—an AP day—can be a direct indication of the overall health and efficacy of your AP department. If your organization is showing a trend of increasing AP days over time, that is a clear indicator that something is amiss in your AP workflows and needs to be addressed.
In this post we’re going to explain what the AP days calculation is, show how the formula works, and explore ways to reduce the number if yours is too high. Let’s start at the start.
What Are Accounts Payable Days?
The term “accounts payable days,” also known as AP days and days payable outstanding (DPO), is a financial ratio that displays the average number of days of credit that an organization has to pay its invoices to vendors and suppliers for a period of time. Put another way, it’s the amount of days that an organization uses to pay its vendors.
It’s calculated to measure the effectiveness of the overall AP process. Think of it like an advanced metric in baseball like wins over replacement (WAR)—it uses a formula to give you a single number that you can use to analyze the effectiveness of a larger system.
*For baseball nerds—WAR measures how much better (or worse) a player is against a typical average player.
The point is that in baseball or in accounts payable, there are dozens of metrics you can track, but if you’re able to get it down to a single number it provides a powerful insight you can actually use. Now let’s learn to calculate AP days.
What’s the AP Days Calculation?
The formula for AP days is super simple: Tally all purchases from vendors during the measurement period and divide by the average amount of accounts payable during that same period.
Here’s what the formula looks like:
It’s not complicated from a mathematics perspective, but important nonetheless. Here’s a quick example to show you how this might look in a real-life scenario:
The controller at Stampli wants to calculate our AP days for the last year. At the beginning of this time period, our beginning accounts payable balance was $500,000 and the ending balance was $750,000. Over the last 12 months, purchases were $5,000,000. With this data, our controller calculates the accounts payable turnover as:
$5,000,000 Purchases / (($500,000 beginning payables + $750,000 ending payables) / 2)
= $5,000,000 purchases / $625,000 Average accounts payable
8 = accounts payable turnover
This means Stampli’s accounts payable turned over 8 times over the last year. To turn this into AP days, we divide 8 turns into 365 days:
365 Days / 8 turns = 45.6 Days
*Note: You should modify this calculation to exclude cash payments to vendors and only include purchases on credit. If you include the cash payments, the AP days will be too low.
Too easy. So what’s the point of going through this exercise?
Why Should You Calculate Accounts Payable Days?
Let’s say you’re curious about how well your AP department is functioning, overall vendor satisfaction, and your cash flow. One way to satisfy your curiosity might be to spot check every vendor payment and the entire paper trail of POs, invoices, and receipts to see how things are going.
Or, you could run a calculation that gives you a single number you can use as a ‘grade’ or benchmark.
Most people are going to opt for the latter, and that’s exactly what measuring AP days does for your organization. When measured against different time periods, AP days can be an indication of the overall financial health of the company as well as the optimization of your AP department.
Are your AP days trending up? Taking longer to pay your vendors is almost always an indication something is off with your company finances.
On the flip side, if you’re paying your vendors quickly, this might mean one of two things:
- Your AP department is locked in and delivering early.
- Your vendors are demanding quick payments for some reason and you need to understand why.
Either way, you now have the data you need to start investigating solutions.
If you find your AP days are too high, you need to understand why as quickly as possible. Too many AP days will put your vendor relationships at risk and may limit your ability to gain credit for future purchases. Additionally, if your suppliers do happen to offer early-payment discounts, you’ll be losing out on those, too, paying more than is necessary.
How to Reduce Your AP Days?
A high number of AP days isn’t always a bad thing—having cash on hand might allow you to make short-term investments that are more valuable to the company. But if the high number of AP days is a liability, there are some actions you can take to reduce them.
Balance outflow / inflow
Start by looking at payment terms, both your suppliers’ and your own. For example, if your own payment terms are 90 days but your suppliers’ payment terms are 30 days, you’re likely going to have an imbalance. By changing your own payment terms to more closely match those of your suppliers’, you can improve that balance.
Streamline AP workflow
56% of businesses experience cash flow forecasting problems due to AP issues, and if you’re in that group, there’s likely some opportunity to streamline your AP workflow.
If you already have your AP workflow documented and have identified bottlenecks that are slowing down your ability to process invoices, you’re a good candidate for an AP automation platform. With AP automation, you can enjoy these benefits:
- Cut invoice processing time
- Save on invoice processing costs
- Reduce errors on invoices
- Reduce the number of AP days
Renova Energy, a Stampli customer, was able to cut their invoice processing time in half through the use of our best-in-class AP automation platform. With automated accounts payable, the accounting team now spends 50% less time on AP processing. The time savings has given them more time to focus on forecasting and reporting.
In general, AP automation streamlines both invoice and business-to-business (B2B) payment processes, all the while helping improve all your cycles and workflows. This can dramatically improve your AP Days metrics and increase efficiency across your financial workflows.
Stampli is a dedicated accounts payable automation platform that’s devoted to helping AP departments modernize their workflows with all kinds of features — from ultimate payment flexibility to vendor management capabilities to an end-to-end invoice management system that facilitates the entire invoice reception, communication, approval, and payment process. That’s also not matter how it’s paid from automated clearing house (ACH) payments, to check or corporate credit cards.
Stampli features an easy-to-use interface that makes the month-end close a breeze, but what really sets us apart is our investment in artificial intelligence (AI), machine learning (ML), and optical character recognition (OCR).
If you’d like to see how Stampli can help you automate your AP workflow and reduce your AP days, schedule a demo with one of our AP Heroes today!
