20.7 Creditors Turnover Ratio

VCE Accounting Unit 4

1. 20.7 Creditors Turnover Ratio

2. As well as managing its stock and debtors, a firm needs to manage its creditors from whom it buys stock Creditors need to be managed well because: They provide the firm with its inventory to sell so any disruption to supply will result in lost sales Buying stock on credit gives the firm time to try and turn the stock into sales and then cash Trade creditors are an excellent source of interest-free finance (unless paid late in which case interest and penalties can apply) 20.7 Creditors Turnover Ratio

3. Supplier Business Customer Debtors Stock Turnover in Days Debtor Turnover in Days How many days does it take to turn purchases of stock into sales ? How many days does it take to collect amounts owing from debtors? 1. Buy stock from suppliers (creditors) 2. Sell stock to customers 20.7 Creditors Turnover Ratio

4. Just like with stock and debtors, a firm needs a measure to evaluate its management of creditors Supplier Business Customer Debtors How many days does it take to pay amounts owing to trade creditors? 20.7 Creditors Turnover Ratio

5. We can measure how long it takes for a firm to pay back its trade creditors with the Creditors Turnover Ratio. This ratio tells us: The number of times per year creditors are turned over, i.e. paid in full The average numbers of days it takes to pay amounts owing to creditors Supplier Business Customer Debtors How many days does it take to pay amounts owing to creditors? 20.7 Creditors Turnover Ratio

6. Creditors Turnover Ratio can be expressed as: The number of times per year creditors are turned over, i.e. paid in full The average numbers of days it takes to pay amounts owing to creditors Creditors Turnover Ratio = Average Creditors Credit Purchases of Stock Creditors Turnover in Days = Credit Purchases of Stock Average Creditors x 365 OR… Creditors Turnover in Days = 365 Creditors Turnover Ratio 20.7 Creditors Turnover Ratio

7. Example : a business had the following end-of-year data from 2014 to 2015: What is the Creditors Turnover Ratio for 2015 ? 2014 2015 Credit Purchases of Stock 40000 Balance of Creditors Control 4000 6000 Creditors Turnover Ratio = Average Creditors Credit Purchases of Stock Creditors Turnover in Days = Credit Purchases of Stock Average Creditors x 365 = 5 000 4 0000 = 8.0 = 40000 5000 x 365 = 46 days 20.7 Creditors Turnover Ratio

8. task In-class Homework SQ14 X