How to calculate creditor days
The formula is: (Trade Creditors / Cost of Goods Sold) x 365. Using cost of goods sold (rather than revenue) is more accurate because it reflects purchases from suppliers, not total sales.
- Formula: (Trade Creditors / Cost of Goods Sold) x 365
- Example: £150,000 creditors / £800,000 COGS x 365 = 68.4 days
- This means the business takes, on average, 68 days to pay its suppliers
Creditor days as a working capital lever
Extending the time you take to pay suppliers is essentially free financing. If you negotiate 60-day payment terms with a key supplier instead of 30 days, you effectively have 30 days of additional funding for the value of your purchases from that supplier.
However, this strategy has limits. Suppliers who are consistently paid late will eventually tighten their own terms, remove credit, or charge more to compensate. The optimal approach is to negotiate longer terms formally rather than simply paying late.
Balancing debtor days and creditor days
The relationship between your debtor days and creditor days is critical. If your customers pay you in 60 days but you must pay your suppliers in 30 days, you have a structural working capital gap of 30 days. Ideally, your creditor days should be equal to or greater than your debtor days so that supplier credit finances your customer credit.
Frequently Asked Questions
Is it legal to pay suppliers late?
Late payment is not illegal, but it can attract statutory interest under the Late Payment of Commercial Debts Act. Persistently late payment can also damage your supplier relationships and credit standing.
How do I negotiate longer payment terms with suppliers?
Frame the conversation around your relationship value, volume of purchases, and payment reliability. Larger, established customers are often able to negotiate 60 to 90-day terms from suppliers who would otherwise offer 30 days.