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QuestionsCategory: Financials QuadrantPayables days calculation
Carolyn Goh asked 1 year ago

Hi Victor,

In the calculation of payables days, why do we only take COGS as the base? what about the SG&A expenses, should this also be included in the base?
i believe that the vendors providing SG&A (like marketing firms, stationery suppliers etc) would also grant some form of payment terms to a company.

1 Answers
Victor Chng answered 1 year ago

Hi Carolyn,

COGS are usually based on the direct cost to produce the product which is the main revenue contributor of the business.

Payables represent the company short-term obligation to its creditors or supplier which may have include the marketing firm or stationery supplier already.

The formula of the payables as mentioned in Investment Quadrant is Payable Days = [Payables / Cost of Goods Sold] x 365 Days. For instance, your payables is $100m while COGS is $40m which will give you a payables days of 912 days. Do note that marketing firms or stationary vendors are small cost compared to COGS but it is not breakdown but rather lump into SGA. Hence, if the SGA is $20m and you include in your calculation of payables. The payables days will be 608 days (100/(40+20) x 365),  the figures is a more aggressive figure as it is lower. As an investor, we want to be more conservative than aggressive. Hope this explanation helps :)

Carolyn Goh replied 1 year ago

Ah got it! Very clear, thanks Victor!