The payable payment period calculation is extremely important to any company's overall fiscal fitness profile. The figure represents the length of credit given to the company by its suppliers, or how long your business takes to pay its creditors. A higher number indicates that the company is paying its bills promptly. Using the calculation for payable payment period is one of two methods for calculating creditor's turnover ratio. This signals to your creditors that you are managing the business well, that you have a solid company, and that they are safe doing business with you.
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Protect your payable payment period number. Review the companies you will do business with. Look for information about their service and delivery histories. Do not allow doing business with a poorly managed service provider to adversely reflect your efficient management. Doing business with companies who are sloppy book-keepers with recurring billing errors and disputes can impact your credit reputation.
Calculate your payable payment period. Keep in mind that the payable payment period figure represents an average time allotted as well as the average time your company takes to pay its creditors. Write down the following formula and apply your own figures. Include all bills payable and tangible products or goods bought. Payable Payment Period = Trade Creditors / Average Daily Credit Purchase Average Daily Credit Purchase = Credit Purchase / Annual Number of Work Days The shorter version of this formula is: Payable Payment Period = (Trade Creditors x Number of Work Days) / Net Credit Purchase. (Note: Use total purchases made if the number for credit purchases is not known.)
Develop better payment schedules, including time cushions, if you need improvement in this area of operations. Consider more ways to take advantage of available credit if your ratio is extremely high. Study and compare your results to other companies, especially those companies who are your direct competitors.
Keep your payable pay period ratio in the 54- to 56-day range so purchase flow will not be affected. This range will also increase or improve the cash position of your company. You will increase Accounts Payable while decreasing payments to suppliers. You are, in essence, increasing the time span of your cash position, or stretching your liquidity. Companies with strong cash positions are said to be more "liquid," and they are viewed to be much more financially solid.
Assess the trend. Study the previous three, five or more years to discern your company's fiscal growth. Look at Accounts Payable at the beginning of the year and Accounts Payable at the end of the year. Average your Accounts Payable per year with these figures. Total your annual Cost of Sales, then determine your Total Days Open for Business. These figures, along with your payable pay period ratio, give you a realistic, by-the-numbers snapshot of your firm's fiscal health and viability.
Tips and warnings
- Carefully manage your company's payment history.
- Strenuously avoid long or slow payment to creditors. This speaks directly to your company's financial state.
- Respect what the numbers reveal. Set emotion and opinion aside if they conflict with what the numbers are telling you about your business.
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