News
11 June 2012
Cash collection. Debtor days - a measure of your success?
What is a debtor day?
Debtor days are a measure of the number of days on average that it takes a company to receive payment for what it sells.
Why are they important?
Debtor days are an indication of a company’s efficiency at collecting the monies that they are owed. With regard to any company the lower the number the better. Every accountant or credit controller must keep an eye on their debtor days, as if those debtor days become a high number then that is a telling sign of a deficiency within that business. For example a high debtor day number may indicate bad debt or incorrect sales figures which can lead to cash flow problems.
How are debtor days calculated?
To determine your debtor days divide the amount of accounts receivable by your company sales then multiply by 365. For example:
Accounts received £ 500,000
Sales £4,000,000
(£500,000 divided by £4,000.000) x 365 = 45.63 days.
Average debtor days depend on sector and the higher the number the more capital a business needs to finance its debtors.
Are your debtor’s days rising or falling? What should you be looking for?
We have assisted clients in reducing debtor days, in one case from over 70 days to 32 days. The cashflow impact has been significant.
Early warning signs for businesses
- Not collecting payment from debtors on time and your average debtor days are increasing
- You have exceeded your bank overdraft
- Outstanding debtors have increased suddenly
- Increased borrowings
- Long standing suppliers reluctant to continue business with you
- More than a month behind in payments to the HM Revenue & Customs
Early warning signs for your customers or clients
- Sudden change in order patterns
- Payment patterns
- Change of delivery/invoice address
- Change of Banker and/or cheque signatory
- Customer will not return calls
- Customer will not accept reasonable solutions to queries
- Upon visiting customers premises – untidy & stock levels low
Decreasing debtor days
- If possible, attempt to get up front payments towards the goods or services supplied.
- Perform credit checks prior to entering into any contracts and certainly before issuing any credit. Set credit limits and do not allow sales to go above this set parameter. Consider pro forma trading with poor credit risk customers.
- Develop a systematic approach to your contractual documentation. From the initial quotation through to the final invoice these documents should be clear and concise.
- Create and maintain a systematic billing system. Be consistent in issuing invoices, statements and the follow up calls to customers. Document all interactions.
- Sales figures are great but cash collection is KING.
If you like to discuss how the Beswicks debt recovery team have helped others & what we might do for you, please contact Richard Anderson on 01782 205000 or email richard.anderson@beswicks.com
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
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