Know Your Critical Numbers – Debtor Days

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

– Sir Richard Branson

Managing cash flow is a critical aspect of running a successful small business. As experienced Nelson accountants, we understand that one of the most common challenges business owners face is getting paid on time. This is where the concept of "debtor days" comes in—a metric that measures how long it takes, on average, for your customers to pay their invoices.

Understanding Debtor Days

Debtor days indicate the average number of days it takes for a business to collect payments from its customers. This metric is crucial for small business accounting as it directly impacts your cash flow. A simple way to calculate debtor days is to divide your current debtor balance by your annual sales and then multiply by 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!

By adopting these strategies, your small business can reduce debtor days, improve cash flow, and maintain healthy financial stability. As trusted Nelson accountants, we're here to help you navigate the complexities of small business accounting and support your financial success. Let’s talk!