Average Payment Period

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Average Payment Period?

Average payment period refers to the average time period taken by an organization for paying off its dues with respect to purchases of materials that are bought on the credit basis from the suppliers of the company, and the same doesn’t necessarily have any impact on the company’s working capital.

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It also tells about the different information of the company such as the cash flow position of the company and its creditworthiness, etc., which is useful for many of the stakeholders of the company, especially the investors, creditors, management, and the analysts, etc. to make the informed decision with respect to the company.

Average Payment Period Explained

Average Payment Period is one of the important solvency ratios of the companySolvency Ratios Of The CompanySolvency Ratios are the ratios which are calculated to judge the financial position of the organization from a long-term solvency point of view. These ratios measure the firm’s ability to satisfy its long-term obligations and are closely tracked by investors to understand and appreciate the ability of the business to meet its long-term liabilities and help them in decision making for long-term investment of their funds in the business.read more and helps a company track and know its ability to pay the amount payable to its creditors.

However, its calculation only considers the financial figures and ignores the non-financial aspects such as the relationship of the company with its customers.

The different important points related to the Average Payment period are as follows:


The average payment period ratio can be calculated using the below-mentioned formula.

Average Payment Period Ratio = Average Accounts Payable / (Total Credit Purchases / Days)

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Below is an example of the average payment period ratio

You can download this Average Payment Period Excel Template here – Average Payment Period Excel Template

During the accounting year 2018, Company A ltd, made the total credit purchases worth $ 1,000,000. For the accounting year 2018, the beginning balance of the accounts payable of the company was $350,000, and the ending balance of the accounts payable of the company was $390,000. Using the information, calculate the Average Payment period of the company. Consider 360 days in a year for the calculation.


  • Beginning balance of the accounts payable of the company: $350,000
  • Ending balance of the accounts payable of the company: $390,000
  • Total credit purchases during the year: $1,000,000
  • Several days in a period: 360 days.

Now in order to calculate the average payment period, firstly the Average Accounts Payable will be calculated as below:

Average Payment Period Example 1

Average Accounts Payable = (Beginning balance of the accounts payable + Ending balance of the accounts payable) / 2

  • = ($350,000 + $390,000) / 2
  • = $370,000

Calculation of the Average Payment Period

Average Payment Period Example 1.1
  • = $370,000 / ($1,000,000/ 360)
  • = $370,000 / ($1,000,000/ 360)
  • = 133.20 days

Thus the average payment period of the company for the accounting year 2018 is 133.20 days.

What Is A Good Average Payment Period?

Ideally, as per the average payment period interpretation, the more creditworthy the customer is and lots of suppliers depend on such customers, the more is the opportunity of the customer to negotiate the payment period. The time lag between the credit purchase made and the actual date of payment is often used by customers who are in a strong position to negotiate.

So it is necessary to have a strong payment history and good cash flow position for the same, which can be used for bargaining. Typically, the situation is such that a business which has less free cash flow will have low power to bargain and thus has to repay early, making the average period of payment less than the situation where the cash flow is more, and the business has more bargaining power.

Therefore, a good average payment period will depend on things like a huge volume of order, orders are placed very frequently and the customer and supplier have good relation with each other.  Since the purchase is in large quantity, a lot of money is blocks for the supplier, and thus this will compel the supplier to wait patiently. If the number of customers in the market are less, then also the customer is at an advantageous position to negotiate because the supplier has less option of customers to sell their products.

So, it can be rightly pointed out that while we calculate average payment period, a good period is the one that are the result of all the above characteristics and, customer gets more time in hand to pay back, which allows them to use that cash for the time being in the business for more useful purpose.


Below are some of the advantages which are as follows,


Below are some of the disadvantages of of average payment period days formula which are as follows,

This article has been a guide to what is the Average Payment Period. We explain the formula along with example, what is a good period & advantages. You can learn more about accounting from the following articles –

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