Another ratio to implicate the period company takes or needs depending on the situation to pay off its debt is the days payable outstanding. It is often shown in financial statements when the management comments on the overall performance for the year, but also in various materials and reports used by investors obviously.

As the formula shows ((accounts payable / cost of sales) x number of days) it clearly displays the number of days a company needs to settle its debt. Now it should be obvious that the longer the period, the longer the suppliers need to manage with their previous debt collections, any bank overdraft or other means of financing. Anything that takes longer than industry average may cause financial difficulties. Hence as a general rule, if the period is getting longer than expected, it is an indication of imminent problems to both sides really. On one hand the supplier has problems with its receivables being collected and the company owning to the supplier is having either problems with financing its debt or may lose its supplier because it may go bankruptcy due to poor accounts receivable management.

Remember that although the longer the period may sound good to you in terms of cash outflow; it may also be bad to the other party in terms of cash inflow. In business nothing is one sided only. Keep an eye out to changes in this ratio obviously, but also don’t keep yourself a single goal to maximising this ratio. Instead try to optimize and keep good relationships.