Creditors Turnover Ratio

It is a ratio between net credit purchases and the average amount of creditors outstanding during the year. It is calculated as follows:

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Net credit purchases = Gross credit purchases less returns to suppliers
_ Average creditors = Average of creditors (including bills payable) outstanding at the beginning and at the end of the year

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on suppliers credit. The extent to which trade creditors are willing to wait for payment can be approximated by the creditors turnover ratio.

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