Ratio analysis is a method of gaining insight into a company’s liquidity, efficiency and profitability by comparing the information contained in its financial statements.
Debtor days is one key measure of ratio analysis. It shows the average number of days that a business takes to collect invoices from their customers. The longer it takes to collect, the greater the number of debtor days.
The formula for working out debtor days is:
(Trade receivables / Annual credit sales) x 365 days
When debtor days increase beyond normal trading terms, it indicates that the business is not collecting debts from customers as efficiently as it should be. If you aren’t getting paid, you won’t be able to upkeep your resources to continue servicing clients.
There are a number of small strategies you can implement to reduce your debtor days. These include:
- • Starting the collection process as soon as the debt falls due, don’t wait until after the terms are exceeded to collect from customers.
- • Creating easy ways of payment, such as PayPal or other online methods.
- • Considering online software that provides options for automated follow-ups on due debts.
- • Offering small discounts on current or future purchases as an incentive for clients to pay on time.