Creditor days (also called payable days or days payable outstanding) measures the average number of days a business takes to pay its trade creditors (suppliers). It is a key working capital ratio that shows how effectively a business manages its supplier payments.
A higher number means the business takes longer to pay its suppliers, preserving cash for longer. A lower number means suppliers are paid more quickly.
How to Calculate Creditor Days
Creditor Days = (Trade Creditors / Cost of Sales) x 365
Alternatively, some analysts use purchases rather than cost of sales as the denominator:
Creditor Days = (Trade Creditors / Purchases) x 365
Using purchases is technically more accurate because cost of sales includes items like direct labour and production overheads that do not generate trade creditor balances. However, purchases are not always separately disclosed in published accounts, so cost of sales is the more commonly used figure.
Worked Example
A UK wholesale business has the following year-end figures:
| Item | £ |
|---|---|
| Trade creditors (accounts payable) | 85,000 |
| Cost of sales | 620,000 |
Creditor Days = (85,000 / 620,000) x 365 = 50 days
This means the business takes an average of 50 days to pay its suppliers.
Interpreting Creditor Days
| Creditor Days | Interpretation |
|---|---|
| Under 30 days | Paying suppliers quickly, possibly faster than necessary |
| 30-45 days | Normal for most UK industries |
| 45-60 days | Slower payment, taking full advantage of credit terms |
| Over 60 days | May indicate cash flow difficulties or deliberate slow payment |
The figure needs to be assessed in context:
- What are the agreed payment terms? If suppliers offer 30-day terms and creditor days are 50, the business is paying late. If terms are 60 days and creditor days are 50, the business is paying early.
- Is it consistent year on year? A sudden increase in creditor days may signal cash flow problems.
- How does it compare to the industry? Different sectors have different norms.
Industry Benchmarks
| Industry | Typical Creditor Days |
|---|---|
| Retail (grocery) | 25-35 |
| Wholesale and distribution | 35-50 |
| Manufacturing | 40-60 |
| Construction | 50-70 |
| Professional services | 20-35 |
| Technology | 30-45 |
Creditor Days and Working Capital
Creditor days is one of three ratios that together define the cash conversion cycle:
| Ratio | Formula | Measures |
|---|---|---|
| Stock days | (Stock / Cost of Sales) x 365 | How long stock is held before sale |
| Debtor days | (Trade Debtors / Turnover) x 365 | How long customers take to pay |
| Creditor days | (Trade Creditors / Cost of Sales) x 365 | How long the business takes to pay suppliers |
Cash Conversion Cycle = Stock Days + Debtor Days - Creditor Days
| Item | Days |
|---|---|
| Stock days | 40 |
| Debtor days | 45 |
| Less: creditor days | (50) |
| Cash conversion cycle | 35 days |
A shorter cash conversion cycle means the business needs less working capital to fund its operations. Increasing creditor days (within the bounds of agreed terms) shortens the cycle and frees up cash.
Managing Creditor Days
Strategies to Optimise Creditor Days
| Strategy | Effect on Creditor Days | Consideration |
|---|---|---|
| Use full payment terms | Increases | Do not pay before the due date unless there is a benefit |
| Negotiate longer terms | Increases | Larger businesses can often negotiate 45 or 60-day terms |
| Take early payment discounts | Decreases | Only if the discount rate exceeds your cost of borrowing |
| Centralise payments | Stabilises | One payment run per week or fortnight gives better control |
| Automate accounts payable | Varies | Reduces errors and ensures invoices are processed on time |
Early Payment Discounts
Some suppliers offer discounts for early payment, such as “2/10 net 30” (2% discount if paid within 10 days, otherwise full amount due in 30 days).
To evaluate whether the discount is worthwhile:
Annualised discount rate = (Discount / (1 - Discount)) x (365 / (Normal terms - Discount period))
For 2/10 net 30:
(0.02 / 0.98) x (365 / 20) = 37.2% annualised
A 37.2% annualised return is almost always worth taking – it far exceeds the cost of borrowing for most businesses.
Late Payment and the Law
UK law protects suppliers from late payment through the Late Payment of Commercial Debts (Interest) Act 1998:
| Right | Detail |
|---|---|
| Statutory interest | 8% above the Bank of England base rate on overdue amounts |
| Compensation | £40 for debts up to £999.99; £70 for debts £1,000-£9,999.99; £100 for debts £10,000+ |
| Recovery costs | Reasonable costs of recovering the debt |
In practice, most suppliers do not exercise these rights for fear of losing the customer relationship, but the legal framework exists.
Payment Practices Reporting
Large UK companies and LLPs (those exceeding two of the turnover, balance sheet and employee thresholds set in the regulations) are required to report their payment practices every six months under the Reporting on Payment Practices and Performance Regulations 2017. The report is published on a government website and includes:
- Average time to pay invoices
- Percentage of invoices paid within 30, 60 and beyond 60 days
- Percentage of invoices not paid within agreed terms
Creditor Days and Cash Flow
Creditor days directly affects the company’s cash position. Consider two scenarios for a business with £620,000 annual cost of sales:
| Scenario | Creditor Days | Trade Creditors (£) | Cash Impact |
|---|---|---|---|
| Pay quickly | 30 | 51,000 | Less cash available |
| Take full terms | 50 | 85,000 | £34,000 more cash available |
That £34,000 difference represents free, interest-free financing provided by suppliers. Managing creditor days effectively is one of the simplest ways to improve cash flow.
Creditor Days Trend Analysis
Tracking creditor days over time reveals patterns:
| Year | Creditor Days | Signal |
|---|---|---|
| Year 1 | 35 | Normal |
| Year 2 | 42 | Slight increase – may be intentional optimisation |
| Year 3 | 58 | Significant increase – possible cash flow pressure |
| Year 4 | 68 | Suppliers likely being paid beyond terms |
A steadily rising trend may indicate the business is stretching its suppliers because it cannot afford to pay on time. This is a warning sign for lenders, investors, and suppliers.
Creditor Days vs Debtor Days
| Feature | Creditor Days | Debtor Days |
|---|---|---|
| Measures | How long you take to pay suppliers | How long customers take to pay you |
| Ideal direction | Higher (within terms) = more cash retained | Lower = faster cash collection |
| Uses | Accounts payable balance | Accounts receivable balance |
| Denominator | Cost of sales or purchases | Turnover |
| Impact on cash | Higher = cash preserved longer | Lower = cash received sooner |
The ideal position is high creditor days and low debtor days – collecting from customers quickly while taking the full credit period offered by suppliers. In practice, most businesses face pressure on both sides.
Creditor Days in Financial Analysis
Banks, investors and credit agencies use creditor days as part of their assessment of a company’s financial health:
- Lenders check whether the business is managing its payables within normal terms
- Suppliers use creditor days (via credit reference agencies) to decide whether to offer credit and on what terms
- Investors look at creditor days alongside debtor days and stock days to assess working capital efficiency
- Management monitors creditor days monthly to balance cash preservation with supplier relationships
A creditor days figure that is significantly above industry norms or above agreed payment terms is a red flag that warrants investigation.