Last editedJan 20222 min read
Cash flow is king. This is a mantra that has sat at the backbone of business for decades and while that cash is now more likely to be a collection of ones and zeros than physical “paper money,” it’s one that still rings true today.
A major part of this flow is the money owed to a company by its debtors. Its account receivables. Because if too many debtors are waiting too long to pay what they owe, you run the risk of giving away too much credit and falling into debt yourself.
That’s why it is so vital for businesses to have a decent grasp of their average debtor days.
What are average debtor days?
Essentially, debtor days refer to how quickly a business gets paid. The average debtor days, therefore, refer to the average number of days it takes for that business to collect payment. The more average debtor days a business has, the less cash a business has available so the fewer debtor days, the better.
This figure can prove invaluable in letting businesses measure themselves against competitors to see whether their debtor days are unusually high or low. It can also help them benchmark against companies outside of their industry bubble and figure out when they should be making efforts to improve their payment collection processes and obtain higher target figures in the future.
How to calculate average debtor days
There are a few options to consider here that will be based on whether you are calculating over a longer or shorter period. Generally, we’d recommend calculating over a period of 365 days, if possible.
In that case, to calculate your average debtor days you’ll need your accounts receivable and your annual credit sales. Your debtor days will be the former, divided by the latter and then times 365. So, for example, if your accounts receivable for the year was £30,000 and your annual credit sales were £210,000, your average debtor days would be 52.
What factors contribute to average debtor days?
The number of debtor days is driven by several factors, including, but not limited to the following.
Depending on your sector, customers might simply have grown accustomed to paying after several days. You’ll find this is more common with businesses that have fewer, larger clients.
If a business offers discounts for clients and customers that pay early, this will almost certainly have an impact on the number of debtor days. The cost of these discounts will need to factor into the bottom line, however.
A business issuing faulty invoices will have to correct those invoices and it is going to take time to correct this before they can be paid.
Businesses offering lines of credit to clients or customers that can’t afford to pay will always lead to an increase in debtor days.
The investment in training, technology and the collection process will correlate with the time it takes to collect payment.
Reducing your average debtor days
If a business wishes to reduce its average debtor days, the most obvious solution is to invest in the actual payment process. Make it easier for clients and customers to pay and it will reduce the time it takes to get paid.
This means setting up clear payment terms, issuing invoices promptly and correctly, and offering as many payment incentives and accessibility options as possible. Keeping an open line of communication with your debtors is also highly encouraged.
Thankfully, there are third-party services that can help simplify and streamline these processes. GoCardless, for example, offers direct debit payments which allow businesses to get paid automatically on the due date. We also have Instant Bank Pay, which lets businesses easily take one-off, same-day payments.
Research from IDC identified that, when working with GoCardless, businesses reduce the time it takes them to get paid by 47% and minimise debtor days by taking control of when and how payments are made.
We can help
If you’re interested in finding out more about average debtor days, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.