Analyse Your Business With The Debtors Days Method

Ratio analysis is a method of gaining insight into a company’s liquidity, efficiency and profitability by comparing the information contained in its financial statements.

Debtor days is one key measure of ratio analysis. It shows the average number of days that a business takes to collect invoices from their customers. The longer it takes to collect, the greater the number of debtor days.

The formula for working out debtor days is:

(Trade receivables / Annual credit sales) x 365 days

When debtor days increase beyond normal trading terms, it indicates that the business is not collecting debts from customers as efficiently as it should be. If you aren’t getting paid, you won’t be able to upkeep your resources to continue servicing clients.

There are a number of small strategies you can implement to reduce your debtor days. These include:

    • • Starting the collection process as soon as the debt falls due, don’t wait until after the terms are exceeded to collect from customers.
    • • Creating easy ways of payment, such as PayPal or other online methods.
    • • Considering online software that provides options for automated follow-ups on due debts.
    • • Offering small discounts on current or future purchases as an incentive for clients to pay on time.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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