Critical Numbers – Debtor Days
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
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:
- Review your terms of trade with your customers – expect payment in 7 days as opposed to the 20th of the month following the invoice
- 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
- Ask for a deposit on signing up for the work
- Do progress invoicing – this way you can see early if you’re not getting paid
- Get on the phone early to your overdue debtors
- 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
- Don’t keep working for people who don’t pay you
- Offer a discount if your customers pay you up front
- Offer many ways for your customers to pay – credit cards, direct debit and automatic payments
- Ask us for 10 more ideas!
‘Never take your eyes off the cash flow because it’s the lifeblood of business’ – Sir Richard Branson