The amount of time between making a sale on credit and receiving payment from the customer is critical information you'll need to track carefully.
Along with managing your accounts receivable by improving your credit and collection techniques, sound cash flow management demands that you keep a sharp eye on your payables and expenses.
Each time you make a purchase from a supplier without paying for it at the time of the purchase, you create an account payable (a payable) for your business. Accounts payable are amounts you owe to your suppliers that are payable sometime within the near future — "near" meaning 30 to 90 days.
Without payables and trade credit you'd have to pay for all goods and services at the time you purchase them.
- The average payable period is the best indicator of your success in managing your cash outflows.
- Our case study shows you how to calculate your average payable period.
- Using your payable period to slow down outflows can significantly improve your cash flow.
- The accounts payable aging schedule is an important tool for keeping track of your payables on a monthly or weekly basis.
Measuring your average payable period
The average payable period measures the average amount of time you use each dollar of your trade credit. That is, it measures how long you use your trade credit before paying your obligations to those businesses or individuals who extend credit to you.
This measurement gauges the relationship between your trade credit and your cash flow. A longer average payable period allows you to maximize your trade credit. Maximizing your trade credit means that you are delaying your cash outflows and taking full advantage of each dollar in your own cash flow.
The average payable period is calculated by dividing your accounts payable by your average daily purchases on account: