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Critical Numbers – Debtor Days

Posted 7 months ago in BUSINESS PLANNING

How long is it taking you to get paid?  How do you measure this and what strategies can you adopt to get paid quicker?

‘Debtor days’ is a commonly-used term to measure, on average, how long your customers are taking to pay you.  There are many complex formulas to calculate this more accurately but a nice easy formula is:

Current debtor balance owing / annual sales x 365

For example:

Sales                    $450,000

Debtor balance owing   $80,000

Debtor Days = $80,000 / $450,000 x 365 = 65 days

If your credit terms are 14 days then, in the above example, you have a real problem.  Even if your debtor days were reduced to 40 (which is still well beyond your target of 14) you’d have $30,000 more cash.

To work out how much cash you can free up by reducing your debtor days by 1 simply divide your sales for the year by 365.  So then if you want to know the impact of the 25 day reduction in the example above the formula is:

25 / 365 x Annual Sales = Debtors

25 / 365 x $450,000 = $30,822

So how might you reduce your debtor days?  Here are some essential ideas to consider:

  1. Review your terms of trade with your customers – expect payment in 7 days as opposed to the 20th of the month following the invoice
  2. Send statements to your customers with only 2 columns; current and overdue – don’t let them think you allow people to pay you after 90 or 120 days
  3. Ask for a deposit on signing up for the work
  4. Do progress invoicing – this way you can see early if you’re not getting paid
  5. Get on the phone early to your overdue debtors
  6. Use an outsourced provider to collect your debtors – as a minimum if you are the business owner, have someone else on the team follow up payments
  7. Don’t keep working for people who don’t pay you
  8. Offer a discount if your customers pay you up front
  9. Offer many ways for your customers to pay – credit cards, direct debit and automatic payments
  10. Ask us for 10 more ideas!

‘Never take your eyes off the cash flow because it’s the lifeblood of business’ – Sir Richard Branson

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