Accounts Payable
AP is money you owe suppliers. When AP goes up, you're holding onto cash longer — which is actually good for cash flow.
Definition
Accounts payable (AP) is the amount a company owes to its suppliers and vendors for goods or services received but not yet paid for. It is a current liability on the balance sheet and a key component of working capital. Increasing AP is a source of cash because the company delays its payments.
Formula
DPO = (Accounts Payable / COGS) × 365
Accounts Payable
Outstanding supplier balances (from balance sheet)
COGS
Cost of goods sold for the period (from income statement)
DPO
Days Payable Outstanding — average days to pay suppliers
Cash Conversion Cycle
How long it takes to turn inventory into cash
DIO (30) + DSO (45) - DPO (35) = 40 days. This means the company needs to fund 40 days of operations before cash comes back in. Lower is better — it means less cash tied up in the cycle.
Working Capital Scenarios
Same formula, very different stories
The company has an $80M cushion. It can pay all short-term bills and still invest in growth. Most industrial and services companies operate this way.
AP and Cash Flow
An increase in AP is a cash inflow (source of cash) because the company has received goods/services but delayed payment. This is the opposite of AR: while rising AR hurts cash flow, rising AP helps it. Companies with strong bargaining power (like Walmart or Amazon) can stretch payables to improve their cash conversion cycle.
DPO Analysis
DPO measures how long a company takes to pay suppliers. Higher DPO means the company retains cash longer — beneficial for cash flow but potentially straining supplier relationships. Extremely high DPO relative to peers may indicate the company is struggling to pay or aggressively stretching terms. Compare DPO to industry benchmarks and watch for trends.
AP in Working Capital Management
AP is part of the cash conversion cycle: CCC = DSO + DIO - DPO. Companies try to maximize DPO while minimizing DSO and DIO. Negative working capital businesses (Amazon) collect from customers before paying suppliers, effectively using suppliers' money to fund operations. In M&A, AP is included in the NWC peg — sellers may try to run up payables before close to inflate cash.
Worked Example — With Real Numbers
A company has $30M in AP and $200M in annual COGS. DPO = ($30M / $200M) × 365 = 55 days. If the company negotiates extended payment terms and increases DPO to 65 days, the additional 10 days frees up approximately $5.5M of cash ($200M / 365 × 10 = $5.5M).
Key Takeaways
AP represents goods/services received but not yet paid for — it's a current liability
An increase in AP improves cash flow — you're delaying cash outflows
DPO measures payment speed — higher DPO benefits cash but may strain supplier relationships
AP is the flip side of AR in the cash conversion cycle
Common Mistakes in Interviews
Treating an increase in AP as bad — it's actually a cash flow positive in the short term
Confusing AP with accrued expenses — AP is specifically for goods/services from suppliers
Not recognizing that extremely high DPO can signal financial distress rather than good management
How Interviewers Test This
A classic question: 'A company stretches its payables by 10 days — what happens?' Balance sheet: AP increases. Cash flow: operating cash flow increases by the corresponding amount. Income statement: no impact (the expense was already recognized).
Related Concepts
Directly referenced in this topic
Accounts Receivable
Accounts receivable (AR) is the amount of money owed to a company by customers w...
Net Working Capital (NWC)
Net working capital (NWC) measures the difference between a company's operating ...
Cash Flow Statement
The cash flow statement reconciles net income from the [income statement](https:...
Balance Sheet
The balance sheet is a financial statement that reports a company's assets, liab...
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