With a little math, we can figure out how quickly your company will pay for purchases made on vendor credit terms. This KPI converts AP turnover into days payable outstanding by using this formula:
In other words it takes the number of actual calendar days from purchase till payment in relation to what would have been received if all payments were due immediately after each transaction date instead of being spread out over time as they are now--which means lower values mean faster finance charges.
The formula is: Days payable outstanding = (Accounts payable x 365 days) / COGS