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VMC: What Is Payables Deferral?

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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.

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.