Financial Ratios - Receivables and Payables Days

What are trade receivables (Debtors)?

Amounts owed to a business by customers

What are trade payables (Creditors)?

Amounts owed by a business to suppliers and others

What are receivable days?

The average length of time taken by customers to pay amounts owed

What are payable days?

The average length of time taken by a business to pay amounts it owes

How should you evaluate receivable days?

• Interpreting the results:

  • Shows the average time customers take to pay

  • Each industry will have a ‘norm’

  • Look out for significant changes

• Look out for:

  • Comparisons (good or bad) v competitors

  • Balance sheet window-dressing

How should you evaluate payable days?

• Interpreting the results:

  • In general, a higher figure is better for cash flow

  • Ideally, payable days are higher than receivable days

  • Be careful: a high figure may suggest liquidity problems (stretching supplier goodwill)

• Look out for:

  • Evidence from the current ratio or acid test ratio that business has problems paying creditors

  • Window-dressing: this is the easiest figure to manipulate