Improve debtor days to help cashflow recovery

In a slower moving economy, it's more important than ever to stay on top of your debt collection.  Establishing how long it takes you to get paid is the first step, but how can you measure this?

Debtor days measures, on average, how long your customers take to pay you.  While there are many complex formulas to accurately calculate this, a nice easy formula is: current debtors owing / annual sales *365.

For example, if you have annual sales of $450,000 and debtors owning of $80,000, your debtor days are 65 ($80,000 / $450,000 * 365).  If, in this example, your payment terms specify payment is expected within 14 days, then you have a real problem and your cash is locked up in your debtors much longer than it should be.

Reducing your debtor days will immediately free up cash.  So, how can you reduce your debtor days?

To see the impact of reducing your debtor days, even by only 1 day, simply divide your annual sales by 365 to establish your daily sales level.  You can then use this figure to calculate the impact or reducing your debtor days by different amounts.

To demonstrate with the above example, if you reduced your debtor days from 65 to 40 - still well beyond your payment terms - you'd have over $30,000 more cash ((65-40) / 365 * $450,000 = $30,822).

Don't let your customers treat you as their bank!  Ensure you're getting paid as soon as possible.  Get in touch to find out how we can help you reduce your debtor days, so you have more cash available in your business!

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