Debtor days, sometimes called days sales outstanding (DSO) are a measure of the time it takes your customers to pay you. The longer customers take to pay their invoices, the higher your business’ debtor days average will be.
You can calculate your company’s debtor days average using our free calculator.
But what effect do debtor days have on your business and how can reducing them affect your bottom line?
Time value of money (TVM) is a basic economic principle that states that money in your bank today in worth more than money in your bank tomorrow.
TVM considers the interest that money accrues when it’s invested and its utility. In other words, if you have cash in your bank account now, you can use it to make more cash, either by collecting interest or through investing in your business’ growth. However, if your cash is tied up in unpaid invoices, its value remains stagnant, so it’s worth less to you.
Additionally, a business owner needs to consider outgoing costs. If you pay your suppliers at the start of the month but your customers fail to pay you until the end of the month, you may find yourself with a cash gap that pushes you into your overdraft and costs you money in overdraft fees.
By reducing your debtor days, you can increase the amount of cash in your bank account today. Say your business makes £100,000 in credit sales every month and your debtor days average is 45. By reducing your debtor days average to 30, you can increase your cash balance by £50,000, here’s how.
The formula for calculating your average debtor balance is:
(debtor days/days in the month) x credit sales = average debtor balance
If your debtor days are 45 and your credit sales are £100,000 a month, your average debtor balance will be £150,000 (if we take 30 days as the average number of days in a month).
45/30 x £100,000 = £150,000
Reduce your debtor days to 30 and your average debtor balance drops to £100,000.
30/30 x £100,000 = £100,000
In other words, you’ve decreased your debtor balance and increased your cash balance by £50,000. That’s an extra £50,000 in cash that you can use to fund your business.
To reduce your debtor days, you need to persuade your customers to pay their invoices faster.
There are two way to do this. The first is by improving your collections process through better credit control. That sounds simple enough, but it can take time and effort. In fact, the average business spends an hour and half each day manually chasing invoices.
A good way to manage your credit control efficiently is to use an automated tool, like Satago. Satago connects to your accounting software and chases invoices so you don’t have to. The email integration feature allows you to send automated payment reminders from your own email address, creating a seamless experience for your customers.
The second way to reduce your debtor days is by credit checking your customers before you agree your payment terms. Satago’s risk insight software provides you with your customers’ credit report and will notify you if their credit score changes. By using this software, you can avoid giving credit to customers who might pay late, or not at all.
Satago customers can reduce their debtor days by up to 72%, save hours every week in manual credit control tasks and significantly increase their cash balance. To try Satago, sign up for a two-week free trial today.