What are Debtors Days?

Debtors days, also known as days sales outstanding (DSO), is a key performance indicator (KPI) used to measure how efficiently your business collects payment from customers. It tells you the average number of days it takes to receive payment after a sale has been made.

The formula is:

Debtors Days = (Debtors ÷ Annual Sales) × 365

This calculation gives you the average number of days your invoices remain unpaid. The lower the number, the faster you’re collecting payments.

Why Are Debtors Days So Important?

1. Cash Flow Impact

Debtors days have a direct effect on your business cash flow. The longer it takes to get paid, the more pressure it puts on your working capital. Reducing debtor days frees up cash that can be used for growth, paying suppliers, or reducing debt.

2. Business Health Indicator

A sudden increase in debtor days might indicate that your clients are struggling financially or that your collection practices need review. It could also mean your terms of trade are too lenient.

3. Operational Efficiency

Monitoring this KPI helps you assess how effective your credit control and invoicing procedures are. It also allows you to track the success of any changes you make to improve collection times.

Real-World Example

Let’s break it down with some numbers.

Scenario: Your business has $1 million in annual sales and an average debtor days of 60.

Calculation: $1,000,000 ÷ 365 × 60 = $164,383

That means at any given point, you have over $164,000 tied up in unpaid invoices.

If you reduce your debtor days to 45:

$1,000,000 ÷ 365 × 45 = $123,287

You’ve now freed up $41,096 in cash, simply by tightening your collection process.

Tracking Changes Over Time

While the exact number of debtor days will vary by industry, what really matters is the trend. A rising debtor days figure can be a red flag, while consistent reduction is a sign of improved financial discipline.

It may reflect:

• Changes in client payment behaviour

• Delays due to poor internal invoicing processes

• Shifts in your credit terms

• Weak enforcement of payment deadlines

Final Thoughts

Debtors days is more than just an accounting ratio, it’s a window into the financial discipline and health of your business. Track it regularly, act on the trends, and use it to drive better cash flow outcomes.

If you're concerned about your debtor days or want help improving cash collection, get in touch with Dolman Bateman today.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.