Average Payment Period-Days: Measures how quickly a company pays its bills for products or services they purchase related to COGS or COS. This is not payments that would be considered normal expenses such as rent or office materials. This is a measure of cash efficiency.Average Payment Period-Days gives a view into how efficiently a company manages its cash. Most companies should “optimize” use of cash, managing payments neither too quickly nor too slowly. The later a company makes payments the more cash they will have as an asset. In some cases fast payments can result in discounts from a supplier which would improve Gross Margin. In general if there are no discounts for quick payments, a company should stretch their payments to their supplier to the maximum of their credit terms with each supplier. If payments are made late or longer than the credit terms with each supplier, the company can run the risk of losing their credit with their suppliers than having to pay immediately or COD. This metric can only be measured if a company uses the Accrual Basis Accounting.
Formula: Accounts Payable X 30 Days / COGS (Monthly)
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