The payable deferral period is a financial ratio that measures the average time a company takes to pay its accounts payable, reflecting cash flow management. A high deferral period suggests effective use of cash, while a low period may indicate poor negotiation with suppliers. It is important to compare this ratio within the same industry for accurate interpretation.

1. By:-
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https://efinancemanagement.com/financial-analysis/payable-deferral-period
Payable Deferral Period

2. 1. Meaning
2. Formula
3. Interpretation
4. Importance
5. Limitations
6. Reference
Content

3. The payable Deferral Period is basically a financial ratio that considers accounts payable and the days on which they
remain unpaid, to calculate the average time it takes a company to pay those bills and invoices.
It primarily indicates how well a company manages its cash flows. If, for example, a company takes too much time to pay
suppliers, it means that it keeps cash to itself for longer or faces a liquidity squeeze. If a company keeps its money, it can
use it for other productive purposes. Or it may invest the money for a very short period of time to earn interest.
Meaning

4. Payable Deferral Period
= (Average Accounts Payable / Cost of Goods Sold) x Number of Days in Accounting Period
Average Accounts Payable
= (Opening Accounts Payable Balance plus Closing Accounts Payable Balance)/2
The Cost of Goods Sold (COGS)
= Opening Stock Plus Purchases Less Closing Stock
Formula

5. A high DPO is good for a company. This means that a company takes longer to pay creditors. The company can use the
money available for short-term productive purposes, such as investments. However, suppliers may not be satisfied with a
high DPO, and may refuse to offer better credit terms.
While, a low DPO means that it is not making effective use of the credit term. Conversely, the company is not able to
negotiate well with suppliers.
Interpretation

6. • Helps analyze and manage the cash cycle analysis and management.
• To compare this ratio with the industry average to get the right interpretation.
• DPO could also increase a company’s goodwill.
Importance

7. • Comparison has to be made with companies operating in the same industry.
• It can also vary within the industry if one company has more bargaining power than others.
Limitations

8. Reference
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