Financial Ratios - Receivables and Payables Days

Key terms:

• Trade receivables (Debtors): Amounts owed to a business by customers

• Trade payables (Creditors): Amounts owed by a business to suppliers and others

• Receivables days: The average length of time taken by customers to pay amounts owed

• Payables days: The average length of time taken by a business to pay amounts it owes

Evaluating 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

Evaluating 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