What is an After-Tax Payable Period
An after-tax payable period is the average period that a company has between receiving goods and paying its suppliers for the goods, utilizing after-tax accounts payable and cost of sales values.
BREAKING DOWN After-Tax Payable Period
After-tax payable periods may vary based on how quickly a company must pay its suppliers and how much working capital it has on hand. For instance, the greater the number of days the company has to pay its suppliers, the more cash the company will have to direct to other working capital needs. The pay period provides an indication of how long the company typically takes to pay its suppliers or creditors. Days payable is also used in the cash conversion cycle. The higher the days in the payable, the lower the cycle.
There are two main different ways a company may run its accounting method to determine how suppliers are paid, affecting the value of the after-tax payable period. A company may choose an accrual method, which would calculate any sale monies as revenue at the point of sale, or it may choose the cash method, which records revenue only when payment has actually been received. Using the cash method means that accounts receivables are not recorded as revenue because the payments have not arrived yet. The way the organization is set up then affects how the company must pay taxes on the services or goods it sells. If a company sells services, for example, it may not pay taxes on the sales of the services but instead the owners of the companies will pay taxes on their overall sales and revenue. With product or good-based services, however, the company might first pay taxes on the product it is purchasing, or in some instances, be tax-exempt when buying from its suppliers. In product-based sales, however, the company will then have to pay sales taxes to the state of the sale or business operation at certain points through the year.
The after-tax payable period uses the after-tax accounts payable with the cost of the sales values that take the type of business structure into account.
Example of After-Tax Payable Period
The payable period, or days payable, calculation is: (average after-tax accounts payable / after tax cost of sales) * N number of days. The value of the after-tax payable period is generally determined either quarterly or yearly, thereby substituting for N either 90 (for quarterly values) or 365 (for yearly values).