In this article, we'll explain what debtor days are, how to calculate them and what you can do to reduce them. You can also use our calculator to work out your debtor days quickly and easily.
Debtor days are a measurement of the average amount of time it takes your customers to pay you. Debtor days are sometimes called ‘days sales outstanding’ or DSO.
If your company has a large number of debtor days, it can put pressure on your cashflow, meaning you have less cash to invest in growing and running your business.
The fewer your debtor days, the faster you’re getting paid and the more cash you have to spend on scaling your business.
Debtor days are calculated periodically on a monthly, quarterly or yearly basis. You can only calculate your debtor days for a period once that period has come to an end. For example, if you want to calculate your debtor days for December, wait until 1st January to make your calculation. Then follow these steps:
1) Calculate your accounts receivables — this is the total amount of money currently owed to you by your customers.
2) Calculate your total credit sales for the period — this is the amount of money you have invoiced your customers for during this period, this number is sometimes called your ‘gross sales’.
3) Divide your accounts receivables by your total credit sales and multiply by the number of days in that period.
So, if you are calculating your annual debtor days the formula looks like this:
(Accounts receivables ÷ credit sales) x 365 = debtor days
Debtor days can vary by industry, so it’s best to check how your debtor days measure up to the standard in your sector in order to gauge whether your collections process is working efficiently.
Generally speaking, you should aim to keep your debtor days under 45.
Data suggests that debtor days have been rising in recent years across many industries, a worrying trend that could be leading more businesses to become insolvent.
The best way to reduce your debtor days is to improve your risk analysis and credit control.
You can improve your risk analysis by performing regular credit checks on new and existing customers using credit checking software, like Satago. Credit checks are a good way to weed out customers who could put your business at risk of late payments and bad debt. You should always perform credit checks on customers before agreeing your payment terms.
The best way to improve your credit control is through automation. Automated credit control tools like Satago connect to your accounting software and chase invoices so you don’t have to. They are extremely efficient and can get you paid significantly faster, whilst saving you time.
A recent article from Accountancy Today suggested that companies who fail to automate their financial processes in 2021 could end up paying a heavy price. Luckily, cloud software has made risk and credit control tools accessible to more businesses than ever before.
Satago is a three-in-one cash management tool which provides risk insight, credit control and invoice finance, all in one place. To try two weeks of Satago free, sign up today.