Average Payment Period Ratio Analysis

Definition: Average Payment Period ratio is used to measure the rate at which the company is able to pay its creditors. It is also known as "Creditors payment period" or "Average credit taken".

Formula:
Average Payment Period = (Average Trade Creditors / Net Credit Purchases) * No. of Days

Example 1:
If credit purchases is $77,000; Return outwards $7,000; Trade creditors $9,000; Bills Payables $3,000.
Then, Trade Creditors in total = 9,000 + 3,000 = $12,000
Net Credit Purchases = 77,000 - 7,000 = $70,000
Average credit taken = (12,000 / 70,000) * 365 = 62.6 days

Example 2:
The following information relates to John Ltd for the year ended 31 December 2009:
Total purchases: $12,150
Credit purchases: $7,100
Return inwards: $990
Return outwards: $600
Creditors at start of the year: $3,900
Creditors at end of the year: $5,100
Calculate the Average Payment Period (in days).

Solution:
Net Credit Purchases = Credit purchases - Return outwards = 7,100 - 600 = $6,500
Average Creditors = (3,900 + 5,100) / 2 = $4,500
Average Payment Period = (4,500 / 6,500) * 365 = 252.7 days

* Next: Average Collection Period Example