How are Creditor Days calculated?
Creditor Days show the average number of days your business takes to pay suppliers. It is calculated by dividing trade payables by the average daily purchases for a set period of time. In this example we’ve used a calendar year.
The equation to calculate Creditor Days is as follows:
Creditor Days = (trade payables/cost of sales) * 365 days (or a different period of time such as financial year)
What you’ll need to calculate Creditor Days
Before you can calculate Creditor Days, you’ll need to have the following numbers available to you.
Trade payables – the amount that your business owes to sellers or suppliers. This can also be referred to as accounts payable.
Cost of sales – in manufacturing: the sum of direct material, direct labor, and factory overheads incurred in making a product; or in retail: the purchase price of merchandise.
Time period – you’ll need to decide what period of time you want to know your Creditor Days over. In the example above we have used a calendar year (365 days).
What does my Creditor Days value mean?
Creditor Days are used to calculate the average time taken for your business to pay suppliers. This number can help you to better understand whether your business is taking full advantage of the trade credit available, as well as identify any potential cashflow problems. This figure is also important as investors looking for an indication of a company’s commercial power may look at how fast it pays customers and suppliers.
Big businesses with plenty of negotiating power may have relatively long creditor days, yet offer short payment terms to their debtors. Most businesses want to improve their cash position so they work towards offering less credit than they take.
Need help managing your cashflow? Find out more.