Average Payment Period

This ratio will tell us the numbers of days or months for making the payments of trade payable. It is propinquity  between no. of working days and creditor turnover ratio. Its formula is given below:

= No. of  Working Days or Months  / Creditor Turnover Ratio

or   Account payable / Net Credit Purchase / 365 or 360

For example, if creditor turnover ratio is 60 times of net credit purchase, then average payment period will be

= 365 / 60 =  6 days

For this instance, we can understand that company will take 6 days to pay its creditors and account payable.

Interpretation of Average Payment Period

If this period will be low, it will be good for our liquidity because more smartly, we will pay our creditors, more amount of credit purchase, we can get.


If this period will be high, it will create the risk for our liquidity position because some creditor can demand and in long period, we can forget to pay. One month or two month is best time period of our creditors. So, our average payment period should be between 30 to 60 days.

 
We can also use this ratio in cash conversion cycle. Cash conversion cycle ratio is
inventory conversion period + average collection period - average payment period. Only calculate this period, we can adjust average payment period for minimum affecting the balance of  normal flow of our cash.