Debt Payment period Part 3
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It measures an average period for which the credit purchases remain unpaid or the average credit period actually availed.
Debt Payment period =
Significance:

It indicates the ability of the firm to pay its trade creditors/suppliers.

A high ratio indicates the shorter payment period.

A low ratio indicates a longer payment period.
Example: Calculate creditors turnover ratio and debt payment period from the following information
Cash purchases Rs.1,00,000 Total purchases Rs.4,07,000
Opening sundry creditors Rs.25,000 Closing sundry creditors Rs.50,000
Closing bill payables Rs.25,000 Opening bill payables Rs.20,000
Purchase returns Rs.7,0001
Solution:
Creditors Turnover Ratio =
Net purchases = Total purchases – Purchase returns
= Rs 407000 – Rs 7000 = Rs 400000
Net credit purchases = Net purchases – cash purchases
= Rs 4,00,000 – Rs 1,00,000
= Rs 3,00,000
Average Creditors =
=
= 60,000
Creditors Turnover Ratio = = 5 times
Debt Payment period = = 73 days
Working Capital Turnover Ratio: It is the ratio between cost of sales and net working capital.
Working capital Turnover Ratio =
Working Capital = Current assets – Current liabilities
Average Working Capital =
Note: If the figure of cost of sales is not given, then the figure of sales can be used. On the other hand if opening working capital is not discussed then working capital at the yearend will be used.
Significance:

It indicates the speed at which the working capital is utilised for business operations.

It measures a company's efficiency and the health of its shortterm finances.

A higher ratio indicates efficient utilisation of working capital

A low ratio indicates the working capital is not properly utilised.

Most analysts consider the ideal working capital ratio to be between 1.2 and 2.
Example:
Find out working capital turnover ratio for the year 2006.
Cash Rs.10,000
Bills receivable Rs.5,000
Sundry debtors Rs.25,000
Stock Rs.20,000
Sundry creditors Rs.30,000
Cost of sales Rs.1,50,000
Solution:
Working capital Turnover Ratio =
Working Capital = Current assets – Current liabilities
Current Assets =
Current Liabilities = Rs.30,000
Net Working Capital = 60000 – 30000 = Rs.30,000
Cost of Sales = Rs.1,50,000
Working capital Turnover Ratio = = 5 times