Debtor days: All you need to know

Cash flow is one of the key indicators that a business is doing well. To ensure your company’s financial health, you need to pay attention to the fundamentals including debtor days.

What are debtor days?

Debtor days is the average time it takes for customers to pay their invoices. The sooner they pay, the stronger your cash flow. If clients keep on delaying payments, it may cause problems like increased debt, costly overdrafts, delayed payroll and vendor payments, and missed growth opportunities.

Why are debtor days important?

It’s important to find a way to limit the number of debtor days to keep your business’ cash flow healthy. Don’t wait until your working capital is fully stretched due to delayed client payments. Debtor days indicate your company’s liquidity, and it measures your business’ ability to handle unexpected costs and sustain your day-to-day operations.

Make sure to calculate and track your debtor days, so you can stay on top of your business and take action before serious cash flow problems arise. The shorter the debtor days, the better.

How do you calculate debtor days?

Manage your receivables well and improve your company’s liquidity by calculating and monitoring this important metric.

Debtor days formula

Just follow this formula to calculate your debtor days ratio.

Debtors days = (average account receivables / annual total sales ) x 365 days

For example, if your average account receivables is 3,000,000 and the annual total sales is 20,000,0000, your debtor days is 54.75 days

Debtors days = (3,000,000 / 20,000,000) x 365 days = 54.75 days

The ideal debtor days ratio is under 45 days. If your debtor days ratio is longer than that, you need to take action and optimize your billing and collection processes.

What do debtor days mean for your business?

You can determine key trends and plan your operations better by identifying and tracking this very important metric. If your debtor days are too long, that’s a big sign of operational inefficiency and poor liquidity.

Typically, payments that are over 60 days past due will only become harder to collect. If the clients ignore your calls, are non-responsive, or fail to pay even after sending demand letters, you can consider bringing in a debt collections agency to take over the process.

However, in some cases, it’s a matter of pending disputes, clients’ complex internal processes, lenient payment terms, or industry-specific economic challenges. The good news is there are many ways to lower debtor days and bring in more cash flow. Calculate your debtor days ratio now and if it turns out to be less than ideal, try to implement some or all of the tips in the next section.

How to improve average debtor days

Calculating your debtor days helps you determine whether or not something is wrong with your operations. If your debtor days ratio needs improvement, you can consider the following remedies:

Make your payment terms as clear as possible- You have probably cultivated a culture of overdue payments due to your leniency and lack of clear payment terms. Make sure to avoid any confusion and make your invoicing straightforward by reinforcing a crystal-clear payment agreement.
Consider charging penalties for overdue payments– This may be an intimidating move for small businesses, but if you keep on shying away from penalizing late-paying customers, that will only take a toll on your business. If it can’t be helped, do remember that this is actually an option and it’s becoming increasingly common to charge late fees.
Automate invoicing- To receive prompt payments, you should also send invoices on time. There are a lot of software tools for automating invoicing and some even offer a centralized dashboard for tracking payments and setting reminders. If you don’t have a solid system in place yet, it’s high time to establish one.
Set up a follow-up routine- Even your prompt customers can forget their invoices sometimes. Make sure that there’s a follow-up system in place when the due dates are coming up. You can send them reminders at certain intervals for timely and consistent follow-up.
Start running credit checks on new clients– Any credit provider would first check a customer’s credit report. Since you’re extending credit to your clients, you can also do the same. If there are customers with bad credit scores, you can make it your protocol to ask for prepayments.
Offer incentives for upfront or early payments- Receiving immediate payments is a great way to support your cash flow, and depending on your status quo, it’s always worth the slight discount. Any opportunity for cost savings will be a great motivator for clients to make payments quickly.
Offer flexible payment methods- You can increase the chances of prompt payments if you offer various payment methods including credit card or online options like PayPal.
Request a deposit- Instead of extending credit to the full purchase, you can ask for a deposit or partial upfront payment. This reduces the risks of excessive overdue payments.
Outsource debt collection- If necessary, you can choose to work with third-party debt collectors, especially for delinquent accounts. This neutral party is also a good option if you want to be persistent without ruining your direct relationship with the client.

Consequences of not paying attention to debtor days

There’s no point in identifying a poor debtor days ratio if you don’t do anything about it. If overdue payments keep up, your business is bound to suffer the following consequences:

Bad debts
Limited cash flow
Missed growth opportunities
Delayed payroll and low employee morale
Late vendor payments
Stress due to unpredictable income and cash flow

How invoice finance can improve cash flow

If you’re already experiencing stress and want immediate relief, invoice finance is the way to go. It’s a form of short-term borrowing against all outstanding customer invoices. The unpaid invoices serve as the collateral to acquire financing.

If you need to urgently solve your cash flow issues to pay your employees, purchase inventory, or seize growth opportunities, invoice financing is a funding option that’s actually easier to qualify for as compared to other types of loans. The application process is very simple with minimal documentation, and the funding can be ready in as fast as 24 hours. You can borrow as much as 90% of the accounts receivables.

You are still responsible for collecting payments on unpaid invoices, but when the customers pay the invoices, you need to pay the lender back with interest and fees. While you’ll have to incur fees, this funding option can quickly alleviate your cash flow problems or help you deal with business emergencies.

Boost your cash flow with Swoop

Swoop is a trusted and reliable loan provider offering invoice financing solutions among many other financing services. The process is quick and easy and you can alleviate your cash flow troubles immediately!

Ready to solve your problem? Get started today.