Creditor days AO2, AO4
AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest
AO4 You need to be able to Demonstrate a variety of appropriate skills. Command Terms These terms require you to demonstrate the selection and use of subject-specific skills and techniques: Annotate, Calculate, Complete, Construct, Determine, Draw, Identify, Label, Plot, Prepare
This ratio measures the length of time it takes the firm to pay its creditors.
Creditor days ratio = Creditors / COGS * 365
In general the firm should seek to maximise the period that it takes to pay its debts. In this way it has the materials and the products it requires, but still has the money for these in its bank account gaining interest.
However, having a high creditor days figure may indicate that the firm is losing out on discounts for early repayment, meaning it is paying more for its materials than perhaps its competitors. Again it is important to place this ratio in the context of the industry in which it operates. For food retailers the creditor days' ratio may be as low as 8 - 12 days. In manufacturing, averages tend to be closer to 37 days.
There should be a link between debtors' days and creditors' days. Creditors' days should be at least as long (or short) as the debtor's days. One can finance the other.