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Also known as days of payment, payment days constitute the average amount of time that passes between when a business receives an invoice from a vendor and when payment for the invoice is prepared and sent out. In most cases, the calculation of payment days is not estimated, but calculated using a specific formula. Many companies periodically evaluate the duration of payment days in the most recently completed quarter to ensure that they are paying invoices in a timely manner.
The basic formula for calculating payment days usually involves multiplying the accounts payable balance by 360. That result is then divided by a second figure, which is determined by multiplying the number of total entries in the accounts payable by twelve. When calculated properly, the figure resulting from this calculation can tell a company whether or not invoices are being entered and allowed to age within an acceptable time frame before remittance is sent to the creditors.
One key benefit of maintaining an equitable range of payment days is that the business tends to maximize the use of its resources while also avoiding the accumulation of late and penalty fees by the creditors. By strategically timing the payment of each invoice, it is possible to allow the money to remain in interest bearing accounts as long as possible before disbursement is made. If the calculation is sound, it is still possible to cut and mail the payment in time to avoid any type of late fees accruing on the vendor account. Thus, the business manages to get the most benefit from the revenue it generates, and still remain in good graces with each of its vendors.
Many companies make use of payment days calculations when it comes to setting up the weekly processes for the function of its payables. Depending on the terms of agreement that govern each vendor account, a business will normally attempt to secure something other than the standard net thirty days for payment on each invoice. It is not unusual for contracts between suppliers and customers to include terms that allow the customer forty-five or even sixty days from the invoice date to pay the full amount without incurring any type of finance charges or late fees. This is particularly true when the contract involves a commitment on the part of the customer to name the supplier as the vendor of choice, and also agrees to purchase a higher volume of goods or services from the supplier over the duration of the contract.
Payment days are never an arbitrary figure that is set by a company. All relevant factors are taken into consideration, making it possible to identify the ideal window of time between receiving an invoice and issuing the payment. Because circumstances do change, companies will tend to re-evaluate payment days as the number and type of entries to the accounts payable changes significantly, and adjust the days of payment accordingly.
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