Welcome to our Help Centre 👋

Debtors and Creditors

Who you need to keep on side and who you need to chase
Written by Max Valentine
Updated 1 year ago

In most businesses, when you make a sale you send out an invoice for full or part payment.  You give your customers a deadline by which they need to have settled the amount.  I like wise your suppliers may offer the same courtesy to you.

This is a form of credit and is prevalent in business. Those who owe you money (who you have given credit terms to) are call Debtors and those whom you owe money (have an outstanding invoice) are called Creditors.

Debtors are considered assets as they represent future cash inflows.  For the purpose of accounting (and our forecasting), this future cash inflow is called the "Receivables".  Creditors are considers (short term) liabilities as this represents a future cash outflow which we term "Payables".

An important point to note, is that though Debtors are future cash, they do not represent cash today and so cannot be used to fund the immediate cash demands of the business.  While Creditors can act as a source of finance and can help cash flows considerably (if the terms offered to customers is in line to the terms offered from suppliers).  This is because your business is benefiting from a good or service that is has not yet paid for.

The Debtors and Creditors make up the company's Working Capital (the last inclusion is the movement of stock). 

In the Numberslides forecasts, the "Receivables" and "Payables" are calculated by understand the average number of Days Given, in the case of Debtors, and takes Days Taken, in the case of Creditors.  This is essentially the days that you GIVE your customers to pay and the days that you TAKE to pay your suppliers.

These days differ greatly depending on your business model.  If you sell items online or have a SAAS product then your Days Given will be zero while in some industries (and in some cases when invoicing large organisations) they days given or the credit terms you give your customer, can be as much as 120 days!  This has a significant impact on cash flows and something that requires careful management and forecasting.

Finally, the Receivables and Payables appear on the Balance Sheet as an asset and liability respectively.  The change in theses balance from one time period to the next is then shown on the cashflow as the working capital calculation.

For further reading, please look up Bad Debts, Debt factoring, Working Capital and Cash Management. 

Did this answer your question?