Days payable outstanding

okay let's move on with our balance sheet kpis and now let's look at days payables outstanding and as we said before this payable outstanding is the measure of number of days it takes you from incurring a cost a cost of goods so you bought raw materials or packaging how long did it takes to pay the supplier and so you want that number to be as long as possible you want to hold into your cash for as long as possible and so this is the number of days it takes to pay vendors.

Now when we look at the DPO or days payable outstanding the formula for that is going to be taking accounts payable and dividing it by your cost of goods and so you take that and you multiply it by the number of days in the period.

Let's go through an example.

So if we are saying that for GutBuddy for May of 2020, our accounts payable is $3 million and our cost of goods sold is 1.2 million multiplied by the number of days in May, 31 days, we'll get 78 days so this is saying that it takes us 78 days to pay the supplier it's not a bad number uh the industry average is about 90 days so you want to try to get a little bit closer to 90 by negotiating with suppliers to have your payment terms get closer to 90.

Are you improving that number? Are you getting from 78 and you're getting closer to 85 or to 90? And the second thing to look at is whether we are paying at the end of the term of the payment.

And so one of the things I've seen at companies is that in many cases, the right hand doesn't know what the left hand is doing.

You are coming up with all these strategies to try and improve your days payable outstanding, but you're not communicating to your accounts payable department.

You want to be able to tell them and instruct them to pay toward the end of the window for payment.