Understanding Accounts Payable Days: A Guide for CPAs
As a CPA, one of the key metrics you'll often encounter when advising clients is Accounts Payable Days (AP Days). This metric measures how long it takes a company to pay its vendors, and it's a critical indicator of financial health. By diving into AP Days, you can help clients improve cash flow, streamline operations, and build stronger relationships with their suppliers.
In simple terms, Accounts Payable Days tracks the average number of days a business takes to pay off its suppliers. While the ideal number varies by industry, the general benchmark falls between 30 to 90 days. The sweet spot lies in paying your suppliers in a timely manner—quick enough to maintain solid relationships and prevent supply chain disruptions, but slow enough to ensure your clients aren’t draining their cash reserves too fast.
So, how can you tell if your client is struggling with their AP Days? Here are some red flags to look out for:
High AP Days: If the AP Days are consistently above 90, it may indicate cash flow issues. Your client might be delaying payments because they don't have enough cash on hand, which can damage vendor relationships.
Low AP Days: Paying too quickly, especially below the industry norm, could suggest that the company isn’t utilizing their cash efficiently. This could lead to missed investment opportunities or strain on working capital.
To help spot these issues, regularly monitor the AP Days metric and compare it to industry benchmarks. Engage in conversations with your client’s vendors to get their perspective as well. Are payments timely? Is there flexibility with payment terms?
Improving AP Days can be financially rewarding for both your clients and your firm. Here’s why:
Cash Flow Management: Longer AP Days allow your clients to hold onto cash longer, which can be invested elsewhere or used for other operational needs.
Vendor Relationships: Efficient AP management ensures vendors are paid on time, fostering stronger relationships, which can lead to better payment terms and priority service.
Operational Efficiency: A balanced AP strategy can help optimize your client's entire supply chain, ensuring smooth operations without unnecessary financial strain.
Here’s a simple step-by-step workflow you can guide your clients through to improve their AP Days:
Assess Current AP Days: Start by calculating the current AP Days using the formula mentioned above. Compare this number to industry benchmarks.
Review Vendor Contracts: Check the terms with key vendors. Are there opportunities to extend payment terms without hurting relationships? Could you negotiate early payment discounts if it makes sense financially?
Improve Cash Flow Forecasting: Help your client set up better cash flow forecasting so they can predict when payments are due and plan accordingly. This ensures they aren’t caught off guard when large invoices need to be paid.
Implement AP Automation: Suggest automating the AP process to streamline approval workflows, reduce delays, and avoid late payments. Tools like Peerview Data’s integration with benchmarking can also offer insights on payment cycles.
Regular Reviews: Set up quarterly or even monthly check-ins to review AP performance and adjust strategies. By keeping an eye on this metric, you can make proactive changes before any cash flow issues arise.
For your clients, finding the right balance with their AP Days means improved cash flow, better vendor relationships, and more operational flexibility. For your firm, offering advisory services that help clients optimize their AP processes can become an additional source of revenue, while showcasing your value as a strategic partner. You’ll not only help them stay financially healthy but also enhance your own client retention.
Retail: In retail, managing supplier relationships is critical to ensuring stock is delivered on time and shelves are always filled.
Manufacturing: Manufacturers rely heavily on raw material suppliers, so effective AP management prevents delays in production.
Healthcare: Healthcare providers often deal with multiple suppliers and service providers, making AP Days vital for keeping operations running smoothly and avoiding disruptions in patient care.
Improving Accounts Payable Days might seem like a small adjustment, but it can have a big financial impact. By helping your clients find the right balance, you’re not only boosting their cash flow but also deepening vendor relationships and operational efficiency. As a CPA, this adds tremendous value to your advisory role—both for your clients and your bottom line.