PAYABLES DAYS Flashcards
What are payables
Payables = The money that a business owes in the long run
What are efficiency ratios
These measure how effectively a business is managing their assets
What are payables days
MEaures the number of days it takes for an organisation to pay their creditors (short term debts)
What the formula for working out payables days
Payables / cost of sales X 365
What are recievables days
Measures the number of days it takes for an organisation to collect debt from customers
What is the formula for recievables days
Recievales / sales revenue X 365
What are inventory (stock) turnover
This ratio measures the number of times per year an organisation replaces the stock that they sell
What are payables
Payables = The money that a business owes in the long run
You need both the balance sheet and the income statement for this (payables will not be shown on the income statement, it also might now be shown on the banalce sheet)
You also need the cost of sales - Which you haven’t been provided with - However you are given the revenue and gross profit, which means the difference between those 2 figures is the cost of sales
Formula = Payables/ cost of sales X 365
4086.5/ 5462.7 X 365
= 273
As you’re expressing that in days, the answer would be 273 days
It took the organsiation 273 days to pay it’s suppliers once they got the goods
How to improve payables days
To reduce the ratio, bills to suppliers should be paid quickly. However, this may worsen the cash flow position.
To increase the ratio, longer payment terms could be agreed with suppliers. However, this could damage the reputation of the business, as being a reliable business that pays bacl it’s debts on time .
interprrting payables days
Suppliers will want to know how long it takes for them to get paid. If the waiting period is very long it may indicate cash flow problems or enreliability. (a long waiting period could be seen as a nagative to some suppliers)
From the point of view of the business, they would want this to be longer than their reciveables dasy as this would mean that they are paid by their customers before they pay their creditors. This would be beneficial for cash flow
