Average period of credit received is calculated in weeks (or months) in order to determine how long a company takes to pay off its trade creditors.

It is incorrect to assume that a company that is successful in having a long credit received period is efficient.

Like everything else in the world, credit comes at a price. If a company takes too long to settle its trade payables, it will suffer from various negative impacts. For example:

  • The company won’t be allowed any cash discounts
  • The company’s suppliers will build in a factor for delayed payments in their prices
  • The company may find it difficult to procure materials during periods of low supply, particularly if suppliers favor companies with better payment histories

Having a reputation for being a late payer causes countless difficulties. Hence, it is in the best interest of the company to ensure that its average credit received period is consistent with the industry average.

Average period of credit received is calculated as follows (for an answer in months):

Average Period of Credit Received Formula

Example

Consider the following information:

  • Creditors: $500,000
  • Net purchases: $3,660,000

Required: Calculate the average period of credit received.

Solution:

Average period of credit received = (Creditors/Purchases)×12
= ($500,000/$3,660,000)×12
= 1.64 month

As this solution shows, the company takes 1.64 months on average to pay off its creditors.

Frequently Asked Questions

What is the average period of credit received by a company?

The average period of credit received is calculated as follows (for an answer in weeks): Average Period of Credit Received = Creditors/Net Purchases×5.2)

How do I calculate a company's net purchases?

A company's net purchases are calculated as follows: Net Purchases = Creditors − (Creditors/Credit Received)×Purchases

How do I calculate a company's creditors?

A company's creditors are calculated as follows: Creditors = Invoices Outstanding with Suppliers + Accrued Payable + Other Amounts Payable + Unbilled Costs

How do I determine if a company's average period of credit received is greater than the industry average?

Companies with an average period of credit received that is greater than the industry average are always late payers. A comparison can be made with the industry average by using ratios. For example, if your company's ratio for this metric is 3.75, then your company is taking 3.75 times longer to pay its creditors than the industry average.

How do I determine if my company is a late payer?

Your company is a late payer if its creditors/purchases ratio is greater than 1.5. For example, if your company's ratio for this metric is 1.7, then your company takes 1.7 times longer to pay its creditors than the industry average.

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