Accounts Payable Santa Rosa – Do you know these Six Easy Steps to Calculate Accounts Payable Cycles?
Accounts Payable is an accounting term which defines short term payment obligations. These are payables due on a monthly or quarterly basis. Accounts payable (A/P) are liabilities on a balance sheet. As a business owner, understanding how to calculate the number of accounts payable cycles will explain how long it takes your business to pay its invoices and how many days invoices are outstanding. You should use history from the previous year to determine payment goals for the current year. Below are seven easy steps to calculate the number of accounts payable cycles for your business. You don’t need an accounting background to understand these steps!
Record the A/P beginning balance as of January 1st of the prior year
Record the A/P ending balance as of December 31st of the prior year.
Add the beginning and ending A/P balances. Take the result and divide it by 2 and record this amount.
Determine all of your purchases for the entire year; for example, purchases from January 1st through December 31st. Record this amount.
Next, take the amount from Step 4 and divide it by the amount recorded in Step 3.
The result is the number of accounts payable cycles for the previous year.
Use the number of cycles to determine how many calendar days it takes your firm to pay its outstanding invoices.
Take the result in Step 5, which is the number of accounts payable cycles, and divide this number by the number of days in a year, 365. The result is the number of days your accounts payable are outstanding.
Here is an example:
If your company’s beginning A/P is 85,925 and your ending balance is 61,935, these two amounts equal 147,860. Divide this by 2 and the result is 73,930.
The total purchases for the last twelve months are 689,000 (Step 4). When you divide the 689,000 by 73,930 the result is 9.32.
This means in the course of a year there are just over nine accounts payable cycles. To determine your A/P cycle in days, divide 365 (days) by 9.32 and the result is 39.
Your company’s accounts payable remained outstanding for thirty-nine days.
Now that you understand how to calculate the number of accounts payable cycles and your days outstanding, why is this important? Well, part of the reason is cash flow. Often start-up companies and small businesses need to keep as much cash on hand as possible. Equally important if cash flow is a factor, then negotiate payment terms for invoices whenever possible. Find out if discounts will be given for paying invoices early. Also, keep in mind that paying invoices too slow may impact your company’s ability to obtain credit.
The bottom line is to make sure that invoices are paid when they are due.
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