What it means
When a company buys goods or services on credit, it owes the supplier until the invoice is paid. Creditor days measures the average time that debt stays unpaid, giving a quick view of how the company manages its supplier payments.
A higher figure means the company takes longer to pay, which keeps cash in the business and acts like a free loan from suppliers. A lower figure means it pays more quickly, which may build strong supplier relationships or earn early payment discounts but uses up cash sooner.
The right level depends on the agreed terms. If suppliers allow 30 days and the company pays in 50, it is paying late, which could damage trust, lead to stricter terms or even interrupted supply.
If it pays in 15 days when terms allow 30, it may be giving away free financing for no reason. Creditor days is usually read alongside debtor days, which measures how long customers take to pay, and inventory days.
Together they make up the cash conversion cycle, which shows how long cash is tied up between paying suppliers and collecting from customers. Calculation choices matter.
Some analysts use cost of goods sold as the base, while others use total purchases, which is more accurate if available. Trade payables should include only amounts owed to suppliers for goods and services, and the same method must be used over time to make trends comparable, whether the figure is calculated monthly or annually.
Lenders and analysts watch for sudden increases. A jump in creditor days may signal that a company is struggling to find cash and stretching its suppliers to cope, so it should be explained.
Seasonal businesses should compare like months with like months, since year-end figures can mislead.
In practice
Real-world examples
Example 1
A clothing retailer has creditor days of 62 against supplier terms of 60. The finance team is satisfied that it pays close to the due date while using almost all the credit available. It keeps the figure under review so that it never drifts far beyond the terms.
Example 2
A restaurant group notices its creditor days rising from 28 to 45 over a year. The finance director finds that cash shortages are causing late payments, and he arranges extra funding before suppliers tighten terms. He then reports the figure to the board each quarter.
Example 3
A manufacturer with a 10-day figure realises it pays far earlier than the 45 days allowed. With annual purchases of about $4,000,000, paying 35 days later frees up roughly $383,000 of cash without breaking any agreement.
Think of it
Creditor days are like borrowing a book from a friend. If you return it in one hour, you are super polite, but it takes constant effort. If you keep it for six months, you save time, but your friend might not lend to you again.
Formula
Calculation
Creditor days = (trade payables / cost of goods sold) x 365
A company reports trade payables of $150,000 and cost of goods sold of $1,095,000 for the year. Cost of goods sold per day is $1,095,000 / 365 = $3,000. Creditor days = $150,000 / $3,000 = 50 days, which is the same as ($150,000 / $1,095,000) x 365 = 0.137 x 365 = 50 days. If the agreed terms are 30 days, the company is paying 20 days late on average.Case study
Seen in the real world
Linden Hill Brewing is an illustrative, fictional craft brewer with annual cost of goods sold of $2,190,000. Its trade payables stood at $240,000, which gave creditor days of 40 against supplier terms of 30.
A late-paying reputation had led its main malt supplier to ask for payment in advance on new orders. The finance manager set up a weekly payment run based on due dates and a revolving credit line to smooth the cash needs.
Within four months, creditor days returned to 31 and the supplier restored its normal terms. In this illustrative case, keeping to agreed terms protected a supplier relationship that mattered more than the short-term cash benefit.
Watch out
Common mistakes
- Believing higher creditor days is always better, when paying well beyond terms can damage supplier relationships and lead to stricter conditions.
- Mixing in non-trade payables such as tax or loans, which distorts the ratio and overstates how long suppliers wait.
- Comparing creditor days across industries without allowing for different norms, since a grocer and a shipbuilder pay on very different cycles.
Questions
People also ask
What is a good creditor days figure?
It is one close to the agreed terms with suppliers and in line with similar businesses, because paying much earlier wastes cash and paying later risks relationships.
How is creditor days different from debtor days?
Creditor days measures how long you take to pay suppliers, while debtor days measures how long customers take to pay you. Ideally the second is shorter than the first.
Should I use purchases or cost of goods sold?
Purchases is more accurate where the figure is available, though cost of goods sold is widely used when it is not, and consistency matters most.