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Payables’ (Credit) collection period

Measures the number of days it takes a business to pay any money owed to its suppliers (ie its creditors). It is calculated by dividing the average figure for payables (creditors) in the period by the value of purchase made on credit during the period (or cost of sales if this figure is not available) and multiplying by 365. NB 1 Average payables (creditors) should be used ie opening payables (creditors) + closing payables (creditors) divided by 2. Closing payables (creditors) may be used providing this is representative. 2 Cost of sales can be substituted for the credit purchases figure if the latter is unavailable. Example: if a business’s payables (creditors) at any one time total £140,000 and credit purchases (or cost of sales) amount to £1.7 million, then it takes the business 30 days on average to settle their bills (140,000 / 1,700,000 x 365). Ideally this figure should be higher than the receivables’ (debtor) days figure. If shorter, this could lead to a cash flow problem. An increase would suggest the firm may be having difficulty in finding cash to pay its debts. Alternatively, suppliers may have extended the credit period.

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