Accounts payable (AP) represents money a company owes to its suppliers for goods and services received but not yet paid for. It is a current liability on the balance sheet and a source of short-term financing. Managing AP strategically helps FP&A teams optimise working capital and cash flow.
In Depth
Accounts payable is the mirror image of accounts receivable — it represents what the company owes to its suppliers rather than what customers owe the company. Strategically managing AP is a key lever for working capital optimisation.
Days Payable Outstanding (DPO) measures how long a company takes to pay its suppliers. DPO = (Accounts Payable / COGS) x Number of Days. Higher DPO means the company retains cash longer, improving working capital. However, paying too slowly can damage supplier relationships and may result in lost early payment discounts.
FP&A teams model accounts payable using DPO assumptions applied to cost forecasts. If monthly COGS and operating purchases total £400K and DPO is 40 days, the expected AP balance is approximately £533K. Increasing DPO from 30 to 40 days on these volumes would release approximately £133K in cash.
The trade-off between payment timing and supplier discounts is an important FP&A analysis. A typical early payment discount of 2/10 net 30 (2% discount for paying within 10 days instead of 30) translates to an annualised return of approximately 36%. Unless the company can earn more than 36% on its cash, taking the discount makes financial sense.
For UK businesses, the Prompt Payment Code and reporting requirements under the Payment Practices and Performance Regulations require large companies to disclose their payment practices. FP&A teams should balance cash flow optimisation with ethical payment practices and regulatory compliance.
Real-World Example
A UK retailer negotiates extended payment terms with its top 10 suppliers, moving from 30 to 45 days. With £2M in monthly purchases from these suppliers, the DPO increase releases approximately £1M in working capital over the transition period. The FP&A team models this as a one-time cash flow benefit that reduces the need for short-term borrowing.
Related Terms
A balance sheet is a financial statement that reports a company's assets, liabilities, and sharehold...
A cash flow statement reports the inflows and outflows of cash over a period, divided into three cat...
Working capital is the difference between a company's current assets and current liabilities, repres...
Accounts receivable (AR) represents money owed to a company by its customers for goods or services d...
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