The debtors day ratio is the average number of days it takes for a business to collect cash owed by its customers.
How is Debtors Day Ratio Calculated
Debtors Days = Trade Debtors/Annual Turnover *365
How is Monthly Debtors Day Ratio Calculated
Debtors Days = Trade Debtors/Monthly Turnover *30
Why is the Debtors Day Ratio Useful
Your debtors day ratio can be a useful way to keep an eye on how quickly your customers pay you on average in comparison to your payment terms set for your business. For example you may set payment terms of 30 days but discover that your debtors day ratio is 60 days. Here are some things that this could show:
- Customers are not being chased for payment as regularly as they should;
- Business cash flow is being unnecessarily being strained;
- Your customers have poor cash flow and should be reassessed for credit.
What is the Ideal Debtors Day Ratio
Ideally your debtors day ratio should match, or be less than, the payment terms you offer to your customers. The payment terms you offer to your customers may depend on the market in which you operate.
How to Improve Your Debtors Days Ratio
A higher debtors day ratio can indicate cash flow problems within a business. Every business ultimately needs cash to run so if customers are slow paying it can, in worst cases, put you out of business. Here are some simple ways to improve your debtors days ratio:
Review Credit Control Procedures
Take a look at your process for chasing customers that owe you money and make sure that invoices are not just being sent out on time but also that statements and reminders are being issued at appropriate times so you get paid on time.
Review of Slow Paying Customers
A review of your aged debtors listing could reveal that certain customers are paying slowly. Consider reviewing the credit terms offered and reducing their credit terms or even requesting payment in advance.
Offer Additional Methods of Payment
Depending on the type of industry you operate in your could consider offering your customers more than one way of paying you for example; bank transfers, credit cards or online.
Turn Work Down
This is a controversial option that needs to be considered carefully. If you have a regular customer, depending on the value and your relationship, you could turn work down from them altogether if they pay you exceptionally slowly and put too much strain on your cashflow.
