Study Notes: Business Finance & Accounting

Creditor Days

“Creditor days” is a similar ratio to debtor days and it gives an insight into whether a business is taking full advantage of trade credit available to it.

Creditor days estimates the average time it takes a business to settle its debts with trade suppliers. As an approximation of the amount spent with trade creditors, the convention is to use cost of sales in the formula which is as follows:

The ccalculation for creditor days can be illustrated as follows:

According to the data, the business is taking slightly less time on average before it pays it suppliers. Creditor days fell slightly from 64.1 days to 62.6 days.

In general a business that wants to maximise its cash flow should take as long as possible to pay its bills.  However, there are risks associated with taking more time than is permitted by the terms of trade with the supplier. One is the loss of supplier goodwill; another is the potential threat of legal action or late-payment charges