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What Is Payables Deferral?

what is payables deferral

Definition of the Payables Deferral Period

  • The period of time a firm takes to pay back their suppliers or creditors for their material purchases is known as payable deferral.
  • Firms with a high payable deferral period have the ability to use the available cash for other short term investments and would benefit from the time value of money.
  • For that reason, some suppliers give discounts to firms who pay faster.

What is the Formula for the Payables Deferral Period?

  • It is calculated by dividing payables by cost goods sold per day.

Payables deferral period = Payables / Cost goods sold per day

Payables Deferral Period in Practice

  • If Bobby hair salon has payables of $600 and the yearly cost of goods sold of $7,300. What is the payable deferral period of the salon?
  • $600 / ($7,300/365) = 30 days 
  • The cost of goods sold has to be divided by 365 as it is the total of the entire year and it has to be converted to COGS per day.
  • In conclusion, Bobby’s hair salon, on average, pays their supplier after 30 days.