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:
The average daily purchases on account is computed by dividing your total purchases on account by 360:
Using the accounts payable balance and your total purchases on account amount from the prior year is usually accurate enough for analyzing and managing your cash flow. However, if more recent information is available, such as the previous month's accounts payable information, then use it instead. Be sure to compute the average daily purchases on account correctly using the number of days actually reflected in the purchases on account figure. For example, use 30 if one month's accounts payable information is used.
See also our case
study on how to calculate your average payable period.