In the world of business, maintaining a healthy cash flow is essential, and one key factor in achieving this is effectively managing your debt collection. But how do you measure and improve debtor days?
What Are Debtor Days?
Debtor days refer to the average time it takes for your customers to settle their invoices. While various complex formulas exist to calculate this, a straightforward method is to use the following formula: Debtor Days = (Current Debtors Owing / Annual Sales) * 365.
For instance, if your annual sales amount to $450,000 and your outstanding debtors total $80,000, your debtor days would be 65 ($80,000 / $450,000 * 365). If your payment terms stipulate payment within 14 days, you may realise that your cash is tied up in debtors for longer than it should be.
Reducing Debtor Days for Better Cash Flow
Reducing debtor days is crucial for freeing up cash quickly. Here are some strategies to consider:
Review Your Terms of Trade: Ensure that payments are due within 7 days of customers receiving their invoices rather than waiting until the 20th of the following month.
Streamline Your Statements: Simplify statements with only two columns, one for current and one for overdue payments. Eliminate columns showing 90 or 120 days overdue, which can inadvertently signal leniency.
Request a Deposit: Consider asking for an upfront deposit before commencing work.
Progressive Invoicing: Invoice for work in stages to monitor payments more closely.
Proactive Communication: Reach out to overdue debtors early via phone or email.
Outsourced Debt Collection: If necessary, consider enlisting an outsourced debt collector or assigning a different team member to follow up on payments.
Avoid Non-Paying Clients: Be prepared to discontinue services for persistent non-payers.
Offer Early Payment Incentives: Encourage upfront payments by offering discounts.
Diverse Payment Options: Provide multiple payment methods, such as credit cards, direct debit, and automatic payments.
Calculating the Impact of Reducing Debtor Days
Even a one-day reduction in debtor days can significantly impact your cash flow. To determine this, divide your annual sales by 365 to establish your daily sales level. Then use this figure to calculate the impact of different reductions in debtor days.
In the example mentioned earlier, reducing debtor days from 65 to 40 would result in over $30,000 in additional cash (($65 – $40) / 365 * $450,000 = $30,822).
Take Control of Your Cash Flow
Don’t allow your customers to treat your business as their financial institution. It’s essential to ensure that you receive payments as promptly as possible. If you’re looking to reduce your debtor days and boost your cash flow, get in touch with us today. We’re here to help you enhance your business’s financial health!
On 22 November from 12-1pm, Sharp Accounting will be running our Cashflow Management Seminar. This will be held at our offices here in Ballarat. Click here to find out more and register at no cost.