by PBS Partners | Jul 3, 2020 | Business
Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability.
Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cashflow gap you might experience and the impact on cashflow planning and budgets.
How to Calculate Debtor Days
(Year-end receivables amount ÷ annual sales) x 365 days = average debtor days.
Here's an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is.
Trade debtors at 30 June 2019 = $35,000
Annual sales for 2019 = $478,000
(35,000 ÷ 478,000) x 365 = 26.7 days
With this information, she can either alter her cashflow planning according to the actual time-frame or take steps to reduce the average number of debtor days.
What can you do to reduce the payment times?
During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website.
Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cashflow. We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cashflow during difficult periods.