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average payment period

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Definition The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable / (total annual purchases / 360). As the average payment period increases, cash should increase as well, but working capital remains the same. Most companies try to decrease the average payment period to keep their larger suppliers happy and possibly take advantage of trade discounts.

Since the average payment period does not affect working capital, APP typically has little or no effect on the valuation of a company or on a merger or acquisition. Recent economic trends have lead to the average APP increasing because of the typical trickle-down effect of payments.

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