The payable period is the average number of days a business holds a supplier invoice before paying it, calculated as average accounts payable divided by purchases for the period and multiplied by the days in the year, though the figure that goes underneath is a stated choice rather than a fixed one. It is also called days payable outstanding (DPO), accounts payable days, and the average payment period, and all four names carry the same measure. It is a count of days rather than dollars, so it answers how long the business took to pay, never how much it owes.
The number is calculated from figures the statements report rather than presented as a line on them, which is how the SEC’s guide frames the ratios investors calculate from statement information and then use to evaluate a company (SEC Beginners’ Guide to Financial Statements). No accounting standard defines it, so more than one version travels under those names and the one used has to be stated with the answer. It is also the third input of the cash conversion cycle, where it enters with a minus sign.
The Formula and Where the Versions Part
payable period = average accounts payable / purchases x 365
average accounts payable = (opening payables + closing payables) / 2The numerator is the payables balance averaged across the period, because the denominator covers a period while the balance sheet reports one date. The denominator is where the versions part, and three of them travel: purchases for the period, purchases made on supplier credit alone, and cost of goods sold.
Credit purchases is the strictest reading. An invoice can only spend days sitting in payables if it entered payables at all, and a purchase settled on the spot never does. Cost of goods sold is the most common substitute, because it is a caption the statements carry and purchases is not. On the statements SEC registrants file, the costs and expenses applicable to sales and revenues caption states cost of tangible goods sold and cost of services separately, with no purchases line among them (17 CFR 210.5-03). Purchases has to be derived from cost of goods sold and the movement in inventory, and that derivation sits with the cash conversion cycle.
Some versions render the same thing as average accounts payable divided by daily purchases, which is this calculation with the day count moved underneath rather than a different measure.
The Numerator Is Narrower Than the Filed Line
An average payables figure lifted off a filed balance sheet is not automatically supplier invoices. Under Regulation S-X that line item covers six further categories besides trade creditors, among them bank borrowings, commercial paper and amounts owed to related parties (17 CFR 210.5-02). Only trade creditors belongs in this measure, and what else that line can hold sits with accounts payable.
Working from a client’s own ledger makes the mix visible rather than removing it, since the payables subledger shows which vendors sit behind the balance, so non-trade amounts can be identified and taken out, and purchases can be totalled rather than backed out. Where a firm prepares that payables work, how fast an invoice gets approved and how many days pass before it is paid stay separate decisions, worked through in an accounts payable outsourcing case study.
A Worked Example
Say a client’s books for the year carry the figures below.
Cost of goods sold 1,800,000
Purchases on supplier credit 1,638,000
Inventory, opening 150,000
Inventory, closing 170,000
Payables, opening 190,000
Payables, closing 210,000
average accounts payable (190,000 + 210,000) / 2 = 200,000
purchases 1,800,000 + 170,000 - 150,000 = 1,820,000
against purchases 200,000 / 1,820,000 x 365 = 40.1 days
against credit purchases 200,000 / 1,638,000 x 365 = 44.6 days
against cost of goods sold 200,000 / 1,800,000 x 365 = 40.6 days
daily purchases 1,820,000 / 365 = 4,986.30
against daily purchases 200,000 / 4,986.30 = 40.1 daysSame payables, same year, and the spread comes entirely from which figure went underneath. A count quoted without its denominator cannot be compared with anything.
What the Payable Period Is Not
It is not the payables balance. This is a duration and the balance is an amount, so a business can carry a large payables figure and a short payable period at the same time by buying a lot and paying quickly.
It is not a grade. A longer count means suppliers are funding more of the work, which is what negotiated terms are for, and it also means invoices are sitting unpaid, which is what a cash shortage looks like. The count cannot separate those two, so neither direction is automatically better or worse.
It is not the terms the supplier granted. Terms are what was agreed and this is what was actually done, and the distance between the two is the reading worth having.
It is not the payback period, which measures how long an investment takes to return its cost and is built from different inputs (formula for payback period).
Common Questions
Divide average accounts payable by the purchases figure for the same period, then multiply by the day count used for the year, 365 for a calendar year or 360 where a lender or a contract works on a banker's year. State three things with the answer: which denominator went in, whether the payables figure is a two-point average or a closing balance, and which day count was used. Accounts payable days, the average payable period and the payable period are one calculation under three labels, so the formula does not change with the name.
No. A payable is an amount owed on an invoice already received and not yet settled, and paying it clears the balance rather than creating one. That is what this measure counts: the days an invoice spends owed, which end the moment it leaves the payables balance.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can test that on a block of its own payables and client statement analysis work through a trial task.
