Debtors and creditors: what your receivables and payables tell you

When you make a sale on credit, the profit shows up in your profit and loss statement straight away, but the cash doesn’t arrive until the customer pays. When a supplier gives you 30 days, the opposite happens: you have the goods now and pay later. Your debtors and creditors are the record of these timing gaps.

What the numbers are

• Debtors (accounts receivable or trade debtors) are amounts customers owe you. business.gov.au describes accounts receivable as a record of all short-term (less than 12 months) accounts from customers that they still need to pay.
• Creditors (accounts payable or trade creditors) are amounts you owe suppliers. business.gov.au describes accounts payable as a record of all short-term liabilities you need to pay.

Both are snapshots. They show what is owed on one day, usually the last day of a month or the financial year.

Aged receivables and aged payables

Your accounting software can produce an aged receivables report (sometimes called aged debtors). It lists who owes you money and sorts each unpaid invoice by how long it has been outstanding, usually in columns such as current, 31 to 60 days, 61 to 90 days and over 90 days.

An aged payables report does the same for the bills you owe suppliers.

These reports are often more useful than the totals. A $100,000 debtors balance that is mostly current is very different from one where a third is over 60 days old. The older an invoice gets, the harder it usually is to collect.

How the ratios are calculated

Days ratios turn a dollar balance into the average number of days money is tied up.

• Debtor days = (trade debtors / yearly credit sales) x 365
• Creditor days = (trade creditors / yearly credit purchases) x 365
• Stock days = (stock / yearly cost of goods sold) x 365
• Cash conversion cycle = debtor days + stock days - creditor days

A few practical notes:

• Use credit sales and credit purchases where you can. Cash sales are paid on the spot, so including them makes debtor days look better than they are.
• A single month-end balance can be unusual. Using an average of several month-end balances gives a truer picture.
• If you are registered for GST, invoices in your debtors and creditors usually include GST, while sales in your profit and loss usually don’t. Your bookkeeper or accountant can adjust for this so the ratios compare like with like.
• A service business with no stock skips stock days.

Worked example

Harbour Signs is a fictional sign-making business in Newcastle. All of its sales and purchases are on credit. Its figures for the year to 30 June are:

Item	Amount
Yearly credit sales	$730,000
Trade debtors at 30 June	$100,000
Yearly credit purchases (materials)	$365,000
Trade creditors at 30 June	$30,000
Yearly cost of goods sold	$365,000
Stock at 30 June	$20,000

Debtor days = ($100,000 / $730,000) x 365 = 50 days.

Creditor days = ($30,000 / $365,000) x 365 = 30 days.

Stock days = ($20,000 / $365,000) x 365 = 20 days.

Cash conversion cycle = 50 + 20 - 30 = 40 days.

Harbour Signs offers customers 30-day terms, so customers are paying about 20 days late on average. Its aged receivables report shows why:

Age of invoice	Amount
Current	$55,000
31 to 60 days	$25,000
61 to 90 days	$12,000
Over 90 days	$8,000
Total	$100,000

Nearly half the balance ($45,000) is past 30 days, and $20,000 is more than 60 days old.

Credit sales average $2,000 a day ($730,000 / 365). If the owner brought debtor days down from 50 to 40, the debtors balance would fall to about $80,000 (40 x $2,000). That frees about $20,000 of cash without making a single extra sale.

What the numbers may tell you

• Debtor days well above your terms may mean customers are paying late, invoices go out slowly, or your collection process isn’t being followed.
• Rising debtor days over several months can be an early warning, even while sales and profit look healthy.
• A few large, old invoices may point to a dispute or a customer in difficulty rather than a general problem.
• Creditor days well above your suppliers’ terms may mean you are stretching suppliers because cash is tight.
• Creditor days well below your terms may mean you pay earlier than you need to, which uses cash you could hold a little longer.
• A longer cash conversion cycle means more cash is tied up in running the business.

To turn the cycle into a dollar amount of working capital, see how much working capital does my business need?

Late-paying customers and supplier timing

Most improvements come from inside the business. business.gov.au suggests running credit checks on customers before offering credit, setting limits on how much credit you offer and starting with a polite reminder by phone or email when an account is overdue. For a full collection process, read what to do when customers pay invoices late.

If a large business is one of your customers, the Payment Times Reports Register shows its average payment terms and payment times to small business. The regulator says the register is free and does not need an account or log in. It can help you set expectations before you agree terms.

On the supplier side, paying within agreed terms protects your relationships and your supply. If you need longer terms, ask before the bill is due rather than paying late.

Where these numbers appear

• Balance sheet. Trade debtors sit in current assets and trade creditors sit in current liabilities. See the lesson on the balance sheet.
• Profit and loss statement. Sales, purchases and cost of goods sold, which you need for the ratios.
• Accounting software. The aged receivables and aged payables reports, which you can run for any date.

When to get professional help

A bookkeeper can keep your debtors and creditors ledgers accurate and run the aged reports each month. An accountant can help you work out the ratios correctly for your business, set sensible targets and read the trend alongside your cash flow forecast. If a customer disputes a debt, what to do when customers pay invoices late covers where to find free dispute help.

Where this becomes relevant to finance

Lenders and finance providers often look at your aged receivables, your debtor days and whether you pay your own suppliers on time, because they show how cash moves through the business. Some types of finance, such as invoice finance, are based on your unpaid invoices. Finance can bridge a timing gap, but it does not fix a collection problem. Tightening terms and following up late payers comes first.

Important things to know

• Profit is not cash until customers pay. A growing debtors balance can leave a profitable business short of cash.
• The ratios are averages. One very slow customer can hide behind a reasonable average. Read the aged report too.
• Compare with your terms and your own history. Industry figures vary widely, so your trend over time usually tells you more.
• Concentration matters. If one customer owes a large share of your debtors, a delay from them can affect your ability to pay your own bills.
• Old debts may not be collectable. Talk to your accountant about how to treat invoices that are unlikely to be paid.