What They Measure
Creditor days is a measure of the number of days on average that a company requires to pay its creditors, while debtor days is a measure of the number of days on average that it takes a company to receive payment for what it sells. It is also called accounts receivable days.
Why They Are Important
Creditor days is an indication of a company’s creditworthiness in the eyes of its suppliers and creditors, since it shows how long they are willing to wait for payment. Within reason, the higher the number the better because all companies want to conserve cash. At the same time, a company that is especially slow to pay its bills (100 or more days, for example) may be a company having trouble generating cash, or one trying to finance its operations with its suppliers’ funds. Ultimately, companies whose creditor days soar have trouble obtaining supplies.
Debtor days is an indication of a company’s efficiency in collecting monies owed. In this case, obviously, the lower the number the better. An especially high number is a telltale sign of inefficiency or worse. It may indicate bad debts, dubious sales figures, or a company being bullied by large customers out to improve their own cash position at another company’s expense. Customers whose credit terms are abused also risk higher borrowing costs and related charges.
Changes in both measures are easy to spot, and easy to understand.
How They Work in Practice
To determine creditor days, divide the cumulative amount of unpaid suppliers’ bills (also called trade creditors) by sales, then multiply by 365. So the formula is:
Creditor days = Trade creditors ÷ Sales × 365
For example, if suppliers’ bills total $800,000 and sales are $9,000,000, the calculation is:
800,000 ÷ 9,000,000 × 365 = 32.44 days
The company takes 32.44 days on average to pay its bills.
To determine debtor days, divide the cumulative amount of accounts receivable by sales, then multiply by 365. For example, if accounts receivable total $600,000 and sales are $9,000,000, the calculation is:
600,000 ÷ 9,000,000 × 365 = 24.33 days
The company takes 24.33 days on average to collect its debts.
Tricks of the Trade
Cash businesses, including most retailers, should have a much lower debtor days figure than noncash businesses, since they receive payment when they sell the goods. A typical target for noncash businesses is 40–50 days.
An abnormally high creditor days figure may not only suggest a cash crisis, but also the management’s difficulty in maintaining revolving credit agreements.
An increasing number of debtor days also suggests overly generous credit terms (to bolster sales) or problems with product quality.