What are debtor days and why should I worried about them?
Debtor Days may sound like the name of a new indie-rock album, but it’s actually a commonly overlooked financial concept that a lot of businesses don’t fully understand. In this blog we’ll outline what debtor days are and why you should be aware of them. Hopefully, this will help you assess what you can do to improve your business processes and increase your cashflow.
A brief overview
Debtor days refers to the average amount of days it takes customers to pay your invoices. When you send out invoices this generally comes with standard terms, like 7 days, 30 days, or the end of the month, for example. However, sending the invoice is just the beginning, as it’s crucial that you track when people have paid and more importantly, when they haven’t. Ultimately, when your clients don’t pay on time, this will have a negative impact on your cashflow. What may seem like a trivial deadline or late payment, can quickly develop into costly overdrafts and cashflow problems.
What should you be aiming for?
Ideally, you want your debtor days to be the same as the terms that you’ve extended to your clients. For example, if your monthly sales equate to £50,000 and your expenses come to £30,000, and you issue your invoices on the first of each month, then you should have £20,000 pounds in your account. Makes sense, right?
Well, this is where things get a bit more complicated. These calculations are all based on your debtor days being 30 days. If, however, your debtor days end up being 60 days, then at the end of the month you could suddenly end up with an overdraft of £30,000. If this trend continues, you will keep eating into your overdraft, which will have a knock-on effect on your cashflow, until you get paid on time. The last thing you want is a costly and completely unnecessary overdraft that burdens your business and restricts your cashflow.
What can I do to reduce my debtor days?
Reducing your debtor days all starts with an understanding of how long it takes for your debtors to pay your invoices. It also helps to be aware of any cashflow issues and the overall financial health of your business. With your accountant you can work out what your actual debtor days are, how this impacts your cash flow, and most importantly what you might be able to do to reduce the amount of debtor days.
By making sure people are paying you on time, you improve your cashflow and stay on top of your outstanding invoices, reducing debtor days in the process. Furthermore, by not spending as much money on overdrafts, you also free up a bit of money which you can reinvest back into your business. Plus, when people pay on time, it poses less of a risk to your business. If your clients make a habit of paying late, then there’s no telling what kind of impact that debt can have on your business.
We can help
There are many things your business can do to optimise your systems and processes when trying to reduce debtor days. For example, simple things like ensuring that your due date is always on your invoice can make a big difference. We can also help you set up systems which can send out automatic notifications when an invoice is nearing due or overdue. Automating your systems means you won’t have to worry about chasing people up for payments manually, while also increasing the likelihood of being paid on time. Plus, clever systems that are on top of payment deadlines also send a good message to your customers and clients and lets them know that your credit control is tight. Let the systems make the required interventions for you, so you can focus on other things.
If you would like to improve your credit control procedures and take advantage of the vast amount of technology out there, then please get in touch with us.