Last editedMar 20222 min read
Most business owners already know the importance of a credit score, but do you know how it’s calculated? One factor that weighs into a credit rating is DBT, or Days Beyond Terms. Whether you’re looking at your business credit report or plan to extend credit to customers, you’re likely to come across DBT. Here’s a closer look at what this term means in the business credit world and how it’s calculated.
What does Days Beyond Terms mean?
Days Beyond Terms (DBT) measures how frequently a business makes late payments to its suppliers. When credit bureaus calculate abusiness’s credit score, they’ll factor DBT into the equation as it accurately shows how capable the business is of making on-time payments. To find out a customer’s DBT average, you can simply run acredit check. It’s also simple to calculate your own DBT, using a formula we’ll provide below.
Why is Days Beyond Terms important?
Understanding how to calculate DBT is useful whether you’re extending credit to a customer or thinking of taking out a loan of your own. A high average DBT makes it more difficult for your business to access favorable finance terms or negotiate for credit. If you want a higher credit rating, it pays off to pay your suppliers on time and reduce your average DBT.
At the same time, if you take on a customer with a high average DBT, this means they have form for not paying their bills on time. That’s something to be aware of because it means they’re also likely to make late payments. Knowing the DBT puts your accounts receivable on alert, so that you can mitigate the impact of late payments with shorter payment terms or lower credit limits.
How is Days Beyond Terms calculated?
To find out your business’s DBT average, you can use the following formula:
DBT = [SUM (invoice values x days past due date)] / [SUM (invoice values)]
To fill in these values, you’ll need to gather all paid invoices for the period in question. Add together the total value of these invoices. You’ll also need to look at the due date for each invoice, comparing this to the date that each invoice was paid. You can use negative numbers if you pay invoices before the due date.
For example, imagine that Company ABC wishes to measure its average DBT for the month of January. The company’s accountant gathers January’s invoices and inputs them into the table below:
|
|
Invoice Value |
Due Date |
Date Paid |
Days in Arrears |
Invoice Value x Days Overdue |
|
Invoice 1 |
1000 |
Jan 5th |
Jan 15th |
10 |
10,000 |
|
Invoice 2 |
500 |
Jan 10th |
Jan 15th |
5 |
2500 |
|
Invoice 3 |
1500 |
Jan 20th |
Jan 15th |
-5 |
-7500 |
|
SUM |
3000 |
|
|
|
5000 |
To calculate the DBT, you would divide 5000 by 3000 for an average value of 1.67. This may or may not be a good thing – it’s important to compare it to the industry average to place it in context.
How does Days Beyond Terms vary by industry?
As withpayment terms, some industries have much higher average DBTs than others. In an ideal world, all businesses would simply pay their suppliers on time, every time. To really understand how a potential customer measures up, you’ll need to compare their average DBT to others in the same sector. Manufacturing, mining, construction, and admin services typically have a higher average DBT than education and arts and entertainment, for example.According to Experian, 80% of US businesses have a DBT between zero to fifteen days, with the average for all industries being seven days.
Whether you’re applying for finance, improving your workflows, or determining a customer’s credit terms, be sure to weigh DBT into the equation.
We can help
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