Debtor days measures how quickly cash is being collected from debtors. The longer it takes for a business to collect, the greater the number of debtor days. Or, in other words, when a customer makes a purchase from you, they will have a set amount of time to pay you. All businesses have debtor days, and all at varying time frames. If you allow too few days for people to pay, then you may find that it becomes a deterrent, where people decide not to buy from you. However, then there are some people who decide to buy form you knowing the cannot pay and can end up not paying your business at all.
A business’ debtor days can make a big impact on your business and how employees and other bills are paid. Even if you are a small or medium-sized enterprises (SME) owner, it is imperative that you understand how debtor days affect your daily operations and what you can do to shorten those days.
Calculating Debtor Days
The right amount of debtor days will depend on your business and your cash flow. Most SMEs use a formula to calculate how many debtor days they should allow for payments. The most common formula is: (Trade receivables / Annual credit sales) x 365
For example, if a business has $55,000 trade receivables and $455,000 annual credit sales, we get 44.12, So your consumers would have 44 days to pay their invoices.
Reducing Your Debtor Days
Be Clear on Payment Terms
Be clear about payment terms. The receipts and invoices you give to consumers are incredibly important and valuable. They should break down the costs and make it clear when payments are due. An invoice can clear up any confusion among consumers so make them as clear and concise as possible.
Many businesses will offer small discounts for those who pay early and up front. Getting the money all at once and in a hurry is often worth the slight discount you will have to afford your customer, and it can be a great motivator for getting that invoice paid quickly.
Charge Late Penalties
Charging an additional late fee is becoming increasingly the norm in business. Having a penalty for being late can also be a strong motivator to pay invoices on time. Outline your late payment charge on your invoice so your customers are aware of it.
Your accounts department needs to have a sound method of tracking invoices, detailing which ones are still outstanding, paid in instalments and not paid at all. They will also be in charge of administering early payment discounts as well as late fees, so it is imperative to have a sound system in place.
Create a follow-up routine. Even some of the promptest customers forget payments from time to time, so introduce a timely follow-up routine that reminds customers when payment due dates are coming up. Send out reminders at different periods, depending on how long your debtor days are.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.