Creditors’ Payment Period

Expressed in days.

Why this ratio matters

The Creditors' Payment Period matters to owners, creditors and investors because it reveals how efficiently a business manages cash flow and supplier relationships. Suppliers use this ratio to assess the risk of extending further credit, since an excessively long period may signal liquidity problems. Owners must balance holding cash longer against preserving supplier goodwill and remaining eligible for cash discounts. This information helps management decide on credit terms, payment scheduling, and whether renegotiating terms with suppliers is needed to maintain adequate working capital.

Worked calculation

Perniagaan Maju Jaya has creditors of RM30,000 and credit purchases of RM160,000 for the year.

= (RM30,000 ÷ RM160,000) × 365

= 68.4 days (≈ 68 days)

Interpretation for Paper 2

• On average, the business takes about 68 days to pay suppliers.
• Comparing the payment period (68 days) with the collection period (44 days) shows the business pays more slowly than it collects, which is good for cash flow.
• If this 68-day payment period exceeds the credit term offered by creditors (for example, 30 days), the business may be facing liquidity difficulties or deliberately delaying payment to conserve cash.
• If this period is rising year on year, it may indicate the business is increasingly relying on supplier credit as a source of working capital financing, rather than practising efficient cash management.
• A payment period considerably longer than competitors in the same industry can harm the business's credit reputation and make it harder to negotiate better credit terms in future.

How to improve this ratio

• Negotiating longer credit terms with key suppliers so the business can retain cash for longer without straining the business relationship.
• Improving cash flow forecasting so the business can plan payments to creditors on an optimal schedule, without paying late.
• Taking advantage of cash discounts offered when the business's cash position allows, since the discount saved usually outweighs the benefit of holding cash longer.

Common student mistakes

• Students often use total purchases (including cash purchases) as the denominator, when the formula requires credit purchases only.
• Many students forget to multiply by 365 days, leaving the answer as a decimal ratio instead of a number of days.
• Students confuse Creditors (suppliers the business owes) with Debtors (customers who owe the business), and use the wrong figure in the numerator.

Limitations

• It assumes all purchases are credit purchases if the credit purchases figure is not given.
• It does not show whether worthwhile cash discounts are being missed.
• This ratio is an overall average and does not show the variation between individual creditors. Some suppliers may be paid promptly while others are paid very late.
• Seasonal fluctuations in purchases can mean the year-end creditors figure is not representative of levels throughout the year, reducing the accuracy of this ratio.

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