EM3086 - Examining Accounts: Business Ratios: Creditors to Stock

It can be worth looking at the proportion of stock which is funded by trade creditors.

• The ratio is Trade Creditors / Closing Stock

This ratio is controlled by the stocking policy of the trader and the credit terms offered by the suppliers.

How realistic is the resulting ratio? Much will depend on the nature and conditions of the trade. A business which has a fast turnover of stock might expect the ratio to be around 1.2. In other words creditors are funding 120 per cent of stock - effectively all the current stock and some of what has already been sold. However, a business which has to hold a wide range of slow moving items, or large stocks of material to be processed, might have to fund much of this stock-holding out of its own assets or from bank-borrowing.

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