Assessing Creditor and Debtor Days

The terms "creditor days" and "debtor days" describe the average number of days a company allows to pass before its creditors are paid, and the average number of days that pass before its debtors pay. They are also called "accounts receivable days."

The former is a measure of a company's creditworthiness and reputation, and to some extent determines the latitude allowed by its suppliers and creditors. This in turn reflects the value both parties put on the business conducted. The exercise also reflects a company's cash flow, and the extent to which it may try to finance its business with its debt. Those companies that delay payment to excess will eventually be penalized by off-hand treatment and problems getting supplies.

The other measure—debtor days—is an indication of how efficiently a company invoices for goods and services and collects from its customers. Obviously, the fewer debtor days the better. Unacceptable delays can suggest that the customer is having cash-flow problems, is overstocked, or is being held to ransom by some of its own customers with power—big supermarket chains, for example. Such customers will eventually face harsh credit terms and lower service levels.

Both measures should be monitored. Signs are easy to spot, easy to understand, and should be tackled without delay.