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Critical Numbers – Debtor Days

How long is it taking you to get paid?  How do you measure this and what strategies can you adopt to get paid quicker?

‘Debtor days’ is a commonly-used term to measure, on average, how long your customers are taking to pay you.  There are many complex formulas to calculate this more accurately but a nice easy formula is:

Current debtor balance owing / annual sales x 365

For example:

Sales                                $450,000

Debtor balance owing   $80,000

Debtor Days =                    $80,000 / $450,000 x 365 = 65 days

If your credit terms are 14 days then, in the above example, you have a real problem.  Even if your debtor days were reduced to 40 (which is still well beyond your target of 14) you’d have $30,000 more cash.

To work out how much cash you can free up by reducing your debtor days by 1 simply divide your sales for the year by 365.  So then if you want to know the impact of the 25 day reduction in the example above the formula is:

25 / 365 x Annual Sales = Debtors

25 / 365 x $450,000 = $30,822

So how might you reduce your debtor days?  Here are some essential ideas to consider:

  1. Review your terms of trade with your customers – expect payment in 7 days as opposed to the 20th of the month following the invoice
  2. Send statements to your customers with only 2 columns; current and overdue – don’t let them think you allow people to pay you after 90 or 120 days
  3. Ask for a deposit on signing up for the work
  4. Do progress invoicing – this way you can see early if you’re not getting paid
  5. Get on the phone early to your overdue debtors
  6. Use an outsourced provider to collect your debtors – as a minimum if you are the business owner, have someone else on the team follow up payments
  7. Don’t keep working for people who don’t pay you
  8. Offer a discount if your customers pay you up front
  9. Offer many ways for your customers to pay – credit cards, direct debit and automatic payments
  10. Ask us for 10 more ideas!

‘Never take your eyes off the cash flow because it’s the lifeblood of business’
– Sir Richard Branson

Co-Pilot Accounting Cambridge