What is creditors turnover ratio?

Answer 1

Creditors are the businesses or people who provide goods and services in credit terms. That is, they allow us time to pay rather than paying in cash. There are good reasons why we allow people to pay on credit even though literally it doesn't make sense! If we allow people time to pay their bills, they are more likely to buy from your business than from another business that doesn't give credit. The length of credit period allowed is also a factor that can help a potential customer decide whether to buy from your business or not: the longer the better, of course. In spite of what we have just said, creditors will need to optimise their credit control policies in exactly the same way that we did when we were assessing our debtors' turnover ratio - after all, if you are my debtor I am your creditor! We give credit but we need to control how much we give, how often and for how long. Let's do some calculations for the Carphone Warehouse. The formula for this ratio is: Creditors' Turnover = Average Creditors (Cost of Sales/365)

As with the stock turnover ratio, creditor values relate to the costs of raw materials, goods and services, which is why we use the cost of sales figure in the denominator (Remember the numerator? Well, this is the opposite. The denominator is the bottom part of a fraction!) {| ! valign="top" | Carphone Warehouse ! valign="top" | 31 March 2001 ! valign="top" | 25 March 2000 ! valign="top" | ! valign="top" | £'000 ! valign="top" | £'000 | Cost of sales 830,126 505,738 Creditors: Amounts falling due within one year 222,348 173,820

! colspan="3" valign="top" | Creditors Turnover Ratio for the Carphone Warehouse | 31 March 2001 222,348

830,126 ÷ 365 97.76 days 25 March 2000 173,820

505,738 ÷ 365 125.45 days We interpret this ratio in exactly the same way as the debtors' turnover ratio. That is, in 2001 if we had bought some supplies for £222,348 on 1st January, we would have paid for them 97.76 days later on 6th April. You can work out the payment date for 2000 if we imagine buying some supplies for £173,820 on 1st January of that year. Having found that debtors are taking somewhere between 30 and 50 days to pay their accounts, notice that the business is taking over three months credit for itself in 2001 and about four months' credit in 2000. These results are worrying: especially when we know that small businesses in the UK are suffering because large businesses take too long to pay their accounts; and if the Carphone Warehouse has many small suppliers that is worrying. |}