Debtor and creditor days

Investors looking for an indication of a firm’s commercial power may look at how fast it pays customers and suppliers.

Enter debtor and creditor days. Say a firm has sales of £500m, opening balance-sheet debtors (receivables) of £50m and closing debtors of £60m. The average is £55m. Expressed in days, that’s (£55m/£500m) x 365, or about 40 days. So on average customers pay up after 40 days.

Now say cost of sales is £300m, opening creditors (trade payables) were £60m and closing creditors (again from the balance sheet) £80m. Average creditors are £70m and creditor days are therefore (£70m/£300m) x 365, or 85 days. So it takes the firm roughly 85 days to pay suppliers after receiving goods on credit.

A firm with a strong bargaining position will not allow customers to take much credit (low debtor days) but will take its time paying suppliers (high creditor days). Generally, the bigger and more dominant the firm, the easier this is.

Merryn

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