Debtor Days Formula & Calculation

Unpaid debts can greatly affect the financial stability of any business. The debtor days formula is a useful tool for businesses to understand how long it takes to collect payments or debts. By calculating your debtor days, you can streamline your processes and improve your cash flow. In this guide, we’ll provide an overview of the formula, walk you through the calculation process, and provide examples.

What is debtors?

When a company provides a product or service to a customer, the customer is invoiced and given a set amount of time to pay. If the customer does not pay within that timeframe, they become a debtor, meaning they owe the company money for the product or service. In other words, debtors are customers who have been invoiced but have not yet paid their outstanding balance.

What is debtor days?

Debtor days is a financial ratio that measures the average number of days it takes for a company to collect payment from its customers for goods or services sold on credit. It is a key metric for managing cash flow and assessing the effectiveness of a company’s credit control and collection policies.

How to calculate debtor days

Debtor days is calculated by dividing the total value of outstanding customer invoices by the average daily sales. This calculation helps businesses to understand how long it takes to collect payments and manage their cash flow effectively.

The debtor days ratio may also be known as the debtor collection period.

These are the two common ways of calculating your business’s debtor days ratio:

The monthly debtor days formula (count-back method)

This method is useful for measuring debtor days for smaller periods, as it takes into account monthly fluctuations. It can be particularly helpful for companies with varying sales throughout the year, as it allows for a better understanding of how monthly changes affect debt collection. However, the calculation process can be complex.

The yearly end debtor days formula

This method is used to calculate debtor days over a full financial year and is as follows:

Debtor days = (accounts receivable / total credit sales) x 365

The 365 represents the total number of days in a financial year.

Both formulas are used to measure how long it takes for a business to collect payment from its customers, and can be useful in assessing a business’s financial health and cash flow management.

Debtor days calculation examples

Company Y has \$50,000 in accounts receivable and \$500,000 in annual credit sales. Using the yearly end debtor days formula, the calculation would look as follows:

Debtor days = (50,000/500,000) x 365 = 36.5.

This means that Company Y has an average collection period of 36.5 days, which indicates the number of days it takes for the company to collect payment from its customers on average.

By tracking debtor days, Company Y can identify any changes in payment trends and adjust their collections strategy accordingly to improve cash flow and financial stability.

Debtor days is an important metric that helps businesses understand the time it takes for their customers to pay them for goods or services provided. The higher the debtor days, the longer it takes for the business to receive payments, which can have a negative impact on their cash flow and financial health.

By calculating debtor days and comparing them to payment terms, businesses can identify inefficiencies in their billing process and work towards improving them. Incentives such as early payment discounts can also be implemented to reduce debtor days.

It’s important to note that debtor days can vary depending on the industry, and businesses should strive to keep their debtor days as low as possible to increase efficiency and maintain financial stability.

How to reduce the time it takes to get paid

Reducing debtor days is important for businesses as it can improve their cash flow and overall financial position. Here are some steps that businesses can take to reduce the time it takes to get paid:

Set clear payment terms

Businesses should set clear payment terms for their customers, including due dates and any late payment fees. These terms should be communicated clearly and in writing to customers.

Invoice promptly and accurately

Businesses should invoice promptly and accurately to ensure that customers have all the necessary information to make payment. Invoices should be detailed and include a clear breakdown of charges and payment instructions.

Offer incentives for early payment

Businesses can offer incentives for customers who pay early, such as discounts or extended credit terms.

Businesses should follow up on overdue payments promptly and regularly. This can include sending reminders, making phone calls, or engaging a debt collection agency if necessary.

Review credit policies

Businesses should review their credit policies regularly to ensure that they are appropriate for their customers and the market conditions. This can include reviewing credit limits, payment terms, and credit checks.

Use technology to streamline processes

Businesses can use technology such as accounting software and electronic invoicing to streamline their processes and reduce the time it takes to get paid.

By implementing these steps, businesses can reduce the time it takes to get paid and improve their cash flow position.

Brixx’s financial modelling tool can help you gain real-time insights into your outstanding debts and accurately predict future trends, allowing you to take proactive measures to minimize risk and avoid delays in debt collection. Our predictive analytics feature is designed to help you make informed decisions about your cash flow and manage your debtor days more effectively. Additionally, Brixx’s customized reports provide you with a clear overview of crucial debtor day metrics such as overdue debts and outstanding balances, allowing you to track your performance over time.

Debtor days FAQs

What are average debtor days?

Average debtor days are the average days it takes for a business to collect payment. A lower number of debtor days is better as it means faster payment and more available cash.

How is the debtor days ratio used in financial analysis?

Debtor days are used as a key performance indicator (KPI) in financial analysis to measure the efficiency of a company’s credit and collections process. The ratio is compared to industry benchmarks to evaluate the company’s performance in collecting outstanding receivables.

What are the factors that can influence debtor days?

Several factors can impact the debtor days ratio, including the credit terms offered to customers, the creditworthiness of the customers, the industry in which the company operates, and the economic conditions in the market.

What is the difference between debtor days and creditor days?

Debtor days measure the average number of days it takes for a company to collect payment from its customers, while creditor days measure the average number of days it takes for a company to pay its suppliers. The difference between debtor days and creditor days can impact a company’s cash flow and working capital management.

What is sundry debtors?

Sundry debtors refer to the accounts receivable that a business has from its customers or clients. In other words, sundry debtors are amounts owed to a company by its customers or clients for goods or services that have been provided, but not yet paid for.

Sundry debtors may include a range of different types of customers, such as individuals, businesses, or other organizations. The term “sundry” refers to the fact that these debts are typically small and varied, rather than large and specific.