Average accounts payable calculation

An accurate view of accounts payable likely requires a measurement of average accounts payable, rather than the most commonly-recorded amount, which is the month-end accounts payable balance. This is especially necessary when incorporating accounts payable into a business ratio, and especially when this information is reported to a lender as part of a loan covenant.

The ending payables balance tends to be too high in comparison to most other days in the month, since some suppliers only bill at month-end. However, the payables balance also tends to decline below the average on any day when a check run is completed and payables are paid off. For example, if suppliers are paid once a week, then the payables balance will run below the average on four days of the month. 

Given these issues, it may may sense to aggregate the payables balance for every business day of the month and then divide by the total number of business days. Of course, the increased accuracy level comes at the cost of the additional labor required to track the daily payables balance. This may still be a reasonable alternative if the accounting system's report writer can issue an automated report that itemizes the daily payables balance and auto-generates an average accounts payable figure. Another variation is to develop a monthly average payables figure based on the ending weekly figure.

It may not be necessary to calculate average accounts payable if the daily payables balance is relatively consistent over time. However, there is a risk that a month-end balance will be unusually high or low, even under circumstances where there is little variation on most days. If the risk of incorporating an unusual payables balance into a measurement is low, then it may be acceptable to use the month-end figure, rather than the average amount of accounts payable.

Related Courses

Business Ratios Guidebook 
Payables Management