Efficiency Ratios
Creditor Days
Creditor Days, or Days Payable Outstanding, measures how long the company takes to pay suppliers.
Concept First
Learn It Step By Step
Start with the business meaning, then move into the formula.
What is Average Trade Payables?
Trade payables are amounts the company owes to suppliers for goods or services already received. They are a short-term source of operating credit, but they also represent cash that must be paid in due course. For example, if raw material is purchased on 60-day credit, the company has inventory immediately but records a payable until it pays the supplier.
What is COGS?
Cost of goods sold: the cost of material or goods consumed to generate the sales of the period, not merely purchases made. Example: raw material and goods consumed to make the products sold during the period.
How should I read the answer?
Longer DPO helps cash flow by using supplier credit, but beyond supplier tolerance it strains relationships and may signal stress.
Formula Lab
Understand the Formula
Read the formula like a business sentence before calculating it.
Formula
Average Trade Payables / COGS x 365
Interpretation
What This Means In Practice
Read the result as a business signal, not as a standalone number.
Efficiency must still protect operations
Longer DPO helps cash flow by using supplier credit, but beyond supplier tolerance it strains relationships and may signal stress. Faster turnover or fewer days is useful only when it does not damage customer service, supplier relationships, production continuity, or sales growth.
What the number is really asking
Supplier credit is useful, but stretching payables too far is not sustainable finance. The business question is how much revenue or cash is produced for every rupee tied up in inventory, receivables, payables, working capital, or assets.
Key Takeaway
Supplier credit is useful, but stretching payables too far is not sustainable finance.
Practice Checkpoint
Check Your Understanding
Work through the quiz in smaller sets. Your answers stay visible while this page is open, so you can review before moving on.
Question 1 of 20
Level 1Higher the result can help cash flow because:
Question 2 of 20
Level 1What is the limitation of very high the result?
Question 3 of 20
Level 1The result is part of which key working capital metric?
Question 4 of 20
Level 1Which underlying item must you understand before calculating or interpreting the result?
Question 5 of 20
Level 1Which statement is the best conceptual reading of this measure?
15 questions remaining in this lesson.
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Knowledge Path
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