# Creditor Days Ratio in Accounting

## What is the Creditor Days Ratio?

The creditor days ratio shows the average number of days your business takes to pay suppliers. It is calculated by dividing creditors by the average daily purchases.

## What is the Formula for Creditor Days?

Creditor days are calculated using the formula shown below.

• Creditors is given in the Balance Sheet and is normally under the heading Trade Creditors or Accounts Payable.
• Purchases is found in the income statement. Assuming inventory levels to do change substantially over the year, purchases can be estimated by taking the total of cost of sales and overhead costs

## How is Creditor days calculated in practice?

 Revenue 440,000 Cost of sales 176,000 Gross profit 264,000 Overheads 135,000 EBITDA 129,000 Depreciation 65,000 Interest 20,000 Profit before tax 44,000 Tax 9,000 Profit after tax 35,000
 Property 300,000 Other fixed assets 90,000 Fixed assets 390,000 Cash 5,000 Trade debtors 95,000 Other debtors 30,000 Inventory 20,000 Current assets 150,000 Trade creditors 70,000 Other creditors 30,000 Current liabilities 100,000 Working Capital 50,000 Bank overdraft 20,000 Bank loans 120,000 Other loans 70,000 Borrowings 210,000 Net assets 230,000 Capital 60,000 Retained profits 170,000 Owners Equity 230,000

In the example above the cost of sales is 176,000 and overheads are 135,000 giving total purchases of 311,000, and trade creditors are 70,000. The creditor days ratio is calculated as follow.

```Days = Creditors / (Purchases / 365)
Days = 70,000 / (311,000 / 365) = 82 days
```

It takes the business on average 82 days to pay its suppliers.

In the above example it is assumed that other creditors does not relate to purchases, for example it might relate to deposits or deferred income, and it is therefore excluded from the calculation.

If you are using purchases for a different period then replace the 365 with the number of days in the management accounting period. For example, if monthly purchases are 18,000 and month end creditors are 19,000 the creditor days is calculated as follows.

```Days = Creditors / (Purchases / 30)
Days = 19,000 / (18,000 / 30) = 32 days
```

## What does the Creditor Days Ratio show?

If your Creditor Days are increasing beyond your suppliers normal trading terms it indicates that the business is not paying its suppliers as efficiently as it should be. For example if your normal terms are 30 days and your Creditor Days ratio is 60 days the business on average is taking twice as long to pay suppliers  as it should do.

Any downward trend in the Creditor Days ratio means that an increasing amount of cash (possibly from overdrafts) is needed to finance the business, this can be a major problem for an expanding businesses.

## Useful tips for using Creditor Days

• The creditor days should be the same as your Terms of Trade with suppliers. If the days ratio is continually higher it means the business is paying its suppliers late which could eventually lead to supply problems. If the days ratio is trending lower than the normal terms of trade it could indicate that suppliers are being paid too early, reducing the amount of cash available in the business, or it might possibly be due to early settlement discounts being taken from suppliers.
• A cash business should have a much lower Creditor Days figure than a non-cash business.
• Typical ranges for the creditor day ratio for a non-cash business would be 30-60 days.