# 4.7. Receivables and payables

#### Days of account receivables – DAR

The days of account receivables state the average number of days that go from the date that the company issued an invoice until its paid. It is common to see the use of the following equation:

• $$DAR=\frac{Clients}{Revenue}\times365$$

However, despite being the most common calculation form, the above equation casts an error by comparing the clients account, which includes VAT, whereas the revenue does not. As such, whenever possible and applicable VAT rate are known, the following equation is better:

• $$DAR=\frac{Clients}{(Revenue)\times(1+VAT\ rate)}\times365$$

It is on every company’s best interest to take an effort to the reduce the average payment deadline, because while doing so the company will reduce its receivables.

#### Days of accounts payables – DAP

The days of accounts payables follows a logic that is similar to that of the accounts receivables, but applies to what the company owes to its suppliers and the purchase of consumables and operating expenses.

• $$DAP=\frac{Suppliers}{Inventory\ purchase+Operating\ expenses}\times365$$

As with the DAR, while calculating the DAP there may be a misfit between Suppliers, whose amounts include VAT and the acquisition of inventory and operating expenses that do not include. Hence it is best to apply the following equation:

• $$DAP=\frac{Supplies}{(Inventory\ purchase+Operating\ expenses)\times(1+VAT\ rate)}\times365$$

In what regards to the treasury and working capital investment of the company it is its interest to extend the deadline of the payments to its suppliers, thus extending the cyclical operating resources.

#### Days of investment accounts payables – DIAP

The days of investment accounts payables is just like the DAP but applied to to the acquisition of investment.

• $$DIAP=\frac{Investment\ suppliers}{Investment\ acquisition}\times365$$

Or (when taking VAT in consideration):

• $$DAP=\frac{Investment\ suppliers}{(Investment\ acquisition)\times(1+VAT\ rate)}\times365$$

#### Days of stock

The days of stock identifies the average number of days that stocks are held by the company until it is sold.

• $$Days\ of\ stock=\frac{Raw\ materials}{Inventory}\times365$$

End of manual: Back to Learning Center