Learning more about what the word Creditors means
home
By using Ratio Analysis the words in the Balance Sheet and Profit and Loss Account can tell us something about how well the business has performed.
Creditors is used in the Suppliers payment ratio (Ratio 7 below) and can therefore tell us something about the efficiency of the business. Remember the word supplier is used to mean creditor.
The higher the figure the longer the business takes to pay it's suppliers (creditors) . It is desirable for the business to delay paying it's suppliers for as long as is possible, whilst maintaining a working relationship with them. This is because delaying payment to suppliers forms a good source of short term finance and it is this delay that makes the business work on a day to day basis.
In other words the higher the ratio the better i.e. Big is Better
The ratio can be expressed  in terms of the number of days, weeks or months that debtors take to pay for goods and services.
Other common ratios are also listed below .
Profitability
1 Return on Capital Employed  =   Profit            x  100 = %
                                                       Capital

2 Gross Profit Ratio                  =   Gross Profit  x  100 = %
                                                            Sales

3 Net Profit Ratio                      =   Net Profit      x  100 = %
                                                           Sales

Efficiency Ratios
4 Stock Turnover Ratio            =  Cost of Goods Sold =  No of times
                                                          Average Stock

5 Fixed Assets Turnover Ratio =  Sales                       = No of times
                                                        Fixed Assets at NBV

6 Debtor Collection Period        =  Average debtors     x 365  = No of days
                                                                   Sales             x   52  = No of weeks
                                                                                         x  12   = No of months

7 Suppliers Payment Period       =    Creditors               x 365   = No of days
                                                          Purchases               x  52    = No of weeks
                                                                                          x  12    = No of months

8 Asset Turnover                       =      Sales                      = No of Times
                                                     Capital Employed

Liquidity Ratios
9 Current Ratio                          =   Current Assets        = Expressed as a
                                                       Current Liabilities        Factor

10 Quick or Acid Test               =  Current Assets - Stock [Also expressed as a Factor]
                                                        Current Liabilities

Investment Ratios
11. Gearing                                 =  Preference Shares + Long Term Loans    X  100%
                                                        Shareholders funds + Long Term Loans
 
 

A Note of caution:
Ratio Analysis is all about comparing one set of ratios with another.
This can mean comparing one year with another, or comparing the performance of one company with another or with its budgets.
To achieve greater confidence in the conclusions you draw, you really need to compare more values than just two. You also need to bear in mind that there is some flexibility in the accounting treatments adopted by accountants when preparing the financial statements and so differences observed in performance might in part be due to differences in the way items have been treated in the accounts rather than differences in performance.
Now test your understanding by attempting to calculate  the suppliers payment period from our own figures.
First you need to know whether to examine  the  trading, profit and loss account or the balance sheet.
If you make a mistake you may return here, for another try, by pressing your internet return button. You must return to this point in any event if you wish to take a peep at the answer
 Trading, profit and loss account          Balance sheet

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 answers to the suppliers payment period

Suppliers payment period =  Trade creditors  (note 1)      x   365   =  100  x  365  = 61 days
                                               purchases           (note 2)                        600
note 1.  The trade creditors figure is taken from the current liabilities section of the balance sheet.  The accruals are assumed not to relate to purchases of goods for resale but for one of the expenses which are listed in the main body of the profit and loss account. If however we were explicitly told that they were for purchases made for resale then the accruals figure would have to be added to the creditors figure. It is also assumed that the creditors figure given is all for purchases made on credit terms for goods sold. In a real life scenario it is likely that creditors would include amounts for expenses such as rent and rates. These amounts would need to be identified and deducted from the creditors figure unless a view was adopted that their inclusion would not affect changes in the trade creditors payment period calculated when compared year by year.
 return to suppliers payment period question