Definition
Accounts payable (AP) represents the company's obligations to suppliers. It is a current liability and component of working capital. Extending AP (delaying payments to suppliers) improves the company's cash position and reduces the cash conversion cycle. However, excessively stretching payables can damage supplier relationships. Days payable outstanding (DPO) measures payment timing.
lightbulb Example
A company has $8M in AP with $60M annual COGS. DPO = ($8M/$60M) × 365 = 48.7 days. The company takes about 49 days on average to pay suppliers. Extending DPO to 60 days would free up $1.8M in working capital.
verified_user Key Points
- Obligations to suppliers for received goods/services
- Current liability on balance sheet
- Extending AP improves cash position
- DPO measures payment timing