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.