Payables in a Nutshell
Payables are the amounts a business owes to its suppliers for goods and services bought on credit. This trade credit is a free source of short-term finance, but paying late damages supplier relationships. Payable days measures how long a business takes to pay its suppliers.
Payables Definition
Payables are the amounts a business owes to its suppliers for goods and services it has bought on credit. They are also called trade payables, and older textbooks call them creditors. They appear as a current liability on the statement of financial position because they must be paid within a year.
Buying on credit is known as trade credit. A business receives stock now and pays 30 or 60 days later, so the supplier is effectively lending it money for free. Trade credit helps cash flow because the business can sell the stock before it has to pay for it. Payables are the mirror image of receivables: receivables are money owed to you, payables are money you owe.
Paying suppliers late can backfire. Carillion, the construction firm that collapsed in 2018, was reported to stretch payments to small suppliers, and many were hurt when it failed. In 2016 the Groceries Code Adjudicator found Tesco had delayed payments to suppliers, and the UK Prompt Payment Code now encourages firms to pay on time.
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Payables Characteristics/Features
- Money owed to suppliers. The value of invoices received but not yet paid.
- A current liability. They appear in current liabilities because payment is due within a year.
- Trade credit. Suppliers allow 30, 60 or even 90 days to pay, acting as free short-term finance.
- Measured in days. Payable days shows the average time a business takes to pay.
- Can earn discounts. Paying early, such as within 10 days, may earn a discount of 2% or more.
- Linked to relationships. Late payment can damage trust and lead to stricter terms.
Examples of Payables
A bike retailer buys £120,000 of stock on 30-day terms. It can sell much of the stock before it has to pay, so supplier credit funds part of its trading.
Tesco was criticised in 2016 by the Groceries Code Adjudicator for delaying payments to suppliers, showing how a powerful buyer can stretch payables at the expense of smaller suppliers.
Carillion was reported to stretch payment periods to small suppliers before its 2018 collapse, which left many unpaid and some in difficulty.
Advantages & Disadvantages of Payables
Advantages
Free short-term finance
Suppliers give time to pay without charging interest. The business can use the cash elsewhere in the meantime. This reduces the need for an overdraft. The positive effect is lower financing costs.
Improves cash flow
Longer payable days keep cash in the bank for longer. The firm can sell stock before it pays for it. Liquidity improves. The positive effect is a stronger cash position.
Supports growth
A growing firm can buy more stock without paying for it immediately. This lets it expand without borrowing. The positive effect is faster, cheaper growth.
Flexibility in a crisis
Negotiating extra time during a tough month can avoid a cash shortage. Suppliers often agree if asked early. The positive effect is breathing space.
Early payment discounts
Paying within 10 days may earn 2% off. On £120,000 of stock, that saves £2,400. This lowers costs and raises profit. The positive effect is a higher margin.
Strengthens supplier relationships
Paying reliably builds trust. Suppliers may offer better terms or priority delivery. This improves supply security. The positive effect is a more dependable supply chain.
Disadvantages
Late payment damages trust
Suppliers who are paid late may demand cash on delivery or refuse to supply. Stock may become hard to get. The negative effect is disrupted trading.
Lost discounts
Paying late means missing early payment discounts. Costs are higher than they need to be. The negative effect is lower profit.
Interest and penalties
Some suppliers charge interest on late invoices. This adds to costs. The negative effect is higher outflows.
Risk to small suppliers
Delayed payments can push small suppliers into trouble. If they fail, the buyer loses a source of supply. Two small manufacturers can disappear quickly. The negative effect is a weaker supply chain.
Reputational damage
Being known as a slow payer harms a firm’s image. Tesco’s 2016 case drew public criticism. Good suppliers may avoid it. The negative effect is lost trust and fewer partners.
Short-term benefit, long-term harm
Stretching payables improves cash this month but may hurt later. Relationships and terms can worsen. The negative effect is a weaker position over time.
Calculating Payable Days
Payable days = (trade payables ÷ cost of sales) × 365. It shows the average number of days a business takes to pay its suppliers. A higher figure means cash stays in the business for longer, but it may signal late payment. Note that the denominator is cost of sales, not revenue.
Worked example. A business has trade payables of £45,000 and cost of sales of £365,000. £45,000 ÷ £365,000 = 0.123. 0.123 × 365 = 45 days. The business takes an average of 45 days to pay suppliers. If terms are 30 days, it is paying 15 days late.
Common Mistakes
Using revenue instead of cost of sales, confusing payables with receivables, forgetting to multiply by 365 and omitting “days” from the answer.
Memory Trick
“Owe over cost, times the year.”
Evaluating the Usefulness of Payables
Is it wise to stretch payables? Evaluation means reaching a justified judgement that depends on the supplier relationship, the market and the firm’s cash needs.
Supplier power
A large buyer such as Tesco can stretch payments, but its suppliers may have few alternatives. A small buyer with a powerful supplier cannot. Power decides who sets the terms.
Cost of lost goodwill
Stretching terms saves cash now but can damage trust. The cost of poor relationships may outweigh the short-term gain.
Cash position and alternatives
A firm short of cash may rely on trade credit to survive. A firm with reserves can take early payment discounts instead. Alternatives such as an overdraft cost interest.
Objectives and context
A firm aiming for survival may need to stretch payables. A firm aiming for a reputation as a fair partner will pay on time. The judgement depends on the market, competition and the long-term view.
Studying and Revising?
Reading through these notes is a solid start, but the real gains come from practising exam-style questions and receiving specific feedback. Most students skip this step because writing answers without marking feels pointless. The AI Business Tutor solves that problem: submit a practice answer, receive feedback broken down by AO1 to AO4, then rewrite and watch your mark improve. You get 3 free credits to start, and lessons and multiple-choice questions are free.
Practice Exam-Style Multiple Choice Questions for Payables
Q1 What are payables?
Show the answer
Correct answer: B. Payables are amounts owed to suppliers for goods bought on credit.
Q2 A firm has payables of £45,000 and cost of sales of £365,000. What are its payable days?
Show the answer
Correct answer: B. (£45,000 ÷ £365,000) × 365 = 45 days.
Q3 Where do payables appear on the statement of financial position?
Show the answer
Correct answer: B. Payables are due within a year, so they are current liabilities.
Q4 Which is an advantage of longer payable days?
Show the answer
Correct answer: A. Taking longer to pay keeps cash in the bank, helping liquidity.
Practice GCSE Exam-Style Questions for Payables with a Case Study
Read the following case study, then answer the questions below.
Harbour Bikes Ltd is a bicycle shop owned by Ravi Sandhu. Each autumn he buys £120,000 of stock from his main supplier on 30-day terms. The supplier offers a 2% discount for payment within 10 days. Winter sales fall by 60%. In February, Ravi paid the supplier three weeks late, and the supplier has warned that it may insist on cash on delivery.
- Calculate the saving if Ravi takes the 2% discount on £120,000 of stock.2 marks
- Explain one benefit to Harbour Bikes of buying stock on credit.3 marks
- Analyse the impact on Harbour Bikes of paying the supplier late.6 marks
- Evaluate whether Ravi should pay early to earn the discount.12 marks
Answer to question 1: £120,000 × 0.02 = £2,400.
Practice A-Level Exam-Style Questions for Payables with a Case Study
Read the following case study, then answer the questions below.
Marlowe Furnishings plc sells furniture through large stores. In 2025, revenue was £310 million, cost of sales was £180 million and trade payables were £29.6 million. In 2026, revenue fell to £295 million, cost of sales to £175 million and trade payables rose to £38.4 million. The company extended its standard supplier payment terms from 60 to 90 days. Two small manufacturers that supply it went into administration.
- Calculate Marlowe’s payable days for 2025 and 2026. Show your working.4 marks
- Explain why Marlowe’s decision to extend terms improves its cash flow.4 marks
- Analyse the risks to Marlowe of extending supplier payment terms.9 marks
- To what extent was it right for Marlowe to extend payment terms to 90 days?16 marks
- Evaluate whether stretching payables is a sustainable way for a business to manage its cash flow.20 marks
Answer to question 1: 2025: £29.6m ÷ £180m × 365 = 60 days. 2026: £38.4m ÷ £175m × 365 = about 80 days.
For the 16-marker, weigh the cash released against the damage to suppliers. Two failed manufacturers show the risk to the supply chain. The judgement depends on how easily Marlowe can replace suppliers and on its need for cash.
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