Every business buys supplies for production as well as for day to day operation of the company. If you are running a small business, you will receive bills and invoices from your suppliers and vendors. If you want to have a good reputation in the market, it is essential that you manage your payable account well.
|Average Payables Period|
Not managing the accounts payable could lead to late payments and bad market reputation. Average payable period calculations can help you in managing your finances well. Let's take a look at the meaning and the method of calculating the average account payable.
The average payable period is a measure for the number of days your firm takes to pay off its suppliers and vendors, it is a useful tool as part of appropriate accounting calculations. Account payable days provide insight into your accounts payable, which can be defined as a short term loan that a company owes to its suppliers.
You may calculate the average payable period by following below formula and steps:
Step 1. To find out the average payable period the first step is to find out the account payable turnover ratio or total accounts payable turnover (TAPT). This can be calculated by referring your financial statements and balance sheets. Accumulate all the purchases that you have made during a year (or a period of your choice) and divide it by the average accounts payable during the same time period.
The average accounts payable can be calculated by averaging the total value of beginning and closing account payable. Use below formula for:
Account payable turnover ratio = Total purchases / [(total of beginning AP balance+ total of closing AP balance) / 2]
Step 2. Once you have obtained the accounts payable turnover ratio or TAPT you just have to divide the value with total number of days in the same period, i.e. 365 days, for a year.
It is a time consuming and a bit difficult to manually calculate the average payable period manually, but fortunately you can take the help of an online calculator, a good example is the Average Payable Period Calculator designed by iCalculator, let's take a look at how simple it is to use.
In order to get the results, you just have to insert the information detailed below into the calculator:
On the basis of the above mentioned inputs the calculator will provide you with the average payable period. The calculator has been designed in a way that provides you results with the least effort and saves your valuable time since it is simple, easy to understand, and online and is at your disposal 24x7 free of charge.
The calculator allows you to calculate the average payable period for a period of your choice, you just have to edit the number of days to get the desired results.
The major factor that is generally ignored by the investors is that the average payable period should not be computed and compared with companies from different industries. This will be like comparing apples and oranges. Different companies have different kinds of cash flows and have several factors that determine their average payable period.
Moreover, companies from the industry could have different average payable periods, because it also depends on the size of a company. Additionally, investors can compare the average payable periods of firms in the same industry that are approximately of the same size. However, this is not necessary a true indicator that a high average payable period is to be considered as a negative factor or vice versa.
A company that has low average payable period might be paying its creditors in time or perhaps too quickly that could mean that the company is not investing in its future properly, or it is not maintaining its cash flows in a proper manner.
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