What is the Debtor Days calculation?
Debtor days is a measure of how quickly a business gets paid. It’s the average number of days taken for a business to collect a payment from its customers.
The average time it takes for a business to get paid within a set time period can reveal a lot about the state of the business; a longer number of debtor days may mean that cash is in short supply. The less cash a business has available to it, the less able they are to invest in growth opportunities, or even to pay their own suppliers.
The debtor days ratio may also be known as the debtor collection period.
How are Debtor Days calculated?
There are a few different ways to calculate the debtor days ratio, and the right calculation to use depends on the context in which you need to know your debtor days.
Best for calculating debtor days monthly – the Count-back method:
If you need to know your debtor days over a smaller period of time and on an ongoing basis, it could be better to use the Count-back method. The benefits of using the Count-back method are that it accounts for fluctuations month on month – a yearly figure may not accurately depict these. This is useful if you have irregular sales amounts during the year. The Count-back method better shows high and low month sales and what the impact is on your debt collection method.
Want to know how to use the Count-back method? Read our blog about it here.
Best for calculating debtor days over a long period of time – the Year End method:
This article helps you calculate debtor days using the Year End method. If you want to check if your debtor days have got shorter or longer this year vs last year, then you can calculate debtor days annually. We’ll show you how to do this using our debtor days calculator below. It’s a straightforward calculation but first you’ll need two things to hand.
What you’ll need to calculate Debtor Days
1. Accounts receivable (also known as year end debtors)
2. Annual credit sales
In the year end method, you can calculate Debtor Days for a financial year by dividing accounts receivable by the annual sales for 365 days.
The equation to calculate Debtor Days is as follows:
Debtor Days = (accounts receivable/annual credit sales) * 365 days
What does my Debtor Days number mean?
The Debtors Days ratio measures how quickly cash it’s taking your debtors to pay you. The longer it takes for a company to get paid, the greater the number of debtors days. Debtor Days are used to show the average number of days required for a company to receive payment from its customers for invoices issued to them.
If you have a high number of debtor days, this means that your business has less cash available to use. This might limit the investments you can make which could stunt growth. You’re more likely to have to go into your overdraft or to take out a loan in order to pay your obligations.
It’s worth comparing how your debtor days compare to your payment terms. If you have terms of 30 days and your debtor days are 60, that means it takes twice as long for debtors to pay you as it should.
Debtor days for a company is driven by a number of factors. The industry norm for how long it takes invoices to be paid can play a big factor. Giving a discount on early paid invoices can also affect debtor days as this encourages early payment, although it’s important to weigh up the benefit of having the cash in the bank vs the monetary loss of discounting invoices. Billing errors are also a key factor in delaying payment – these typically takes a long time to correct.
Having a transparent view of both debt and cashflow puts your finance team in the most insightful position possible – allowing you to spot the issues, take action and keep the company’s cash in a positive position.