Using the Average Payable Period

April 13, 2006

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The average payable period can be used to see the benefits of the basic rule regarding cash outflows — pay your bills on time, but never pay your bills before they are due. The following chart illustrates the benefits of this basic rule.

	Increments in the Average Payable Period (Days)
Average Daily POA*	1	3	5	10
	Amount of Delayed Cash Outflow
$ 100	$ 100	$ 300	$ 500	$1,000
$ 300	300	900	1,500	3,000
$ 500	500	1,500	2,500	5,000
$ 800	800	2,400	4,000	8,000
$1,000	1,000	3,000	5,000	10,000

*POA = purchases on account

The above chart illustrates the benefits of extending your average payable period. For example, assume that your average daily purchases on account is $300 a day, and that your average payable period is 20 days. Now assume that you were able to extend your average payable period from 20 days to 30 days. From the illustration above, you can see that adding 10 days to your average collection period defers $3,000 in cash outflows. This also represents $3,000 of interest-free financing that you can use for reducing debt, or making other necessary purchases.