In the final part of our series on some of the tools that can help you review the health of your business, our Chief Accountant Emily explains “debtor days”. This is a ratio that indicates how quickly your customers pay you.
The smaller this figure is, the better, as it means that your customers usually pay you quickly. If your debtor days figure is higher than the number of days’ credit you give your customers, then you certainly need to improve your credit control, possibly by using a tool like FreeAgent’s automatic invoice reminders.
To work out your debtor days, take your business’s trade debtors figure from the end of a 12-month period. You’ll find this on your balance sheet.
Then divide that by the business’s sales for the previous 12 months, which you’ll find on your profit and loss account.
Multiply the result by 365 to give your debtor days.
This business’s debtor days figure is £23,362 / £61,558 x 365 = 139.
This means that, on average*, the business’s customers take 139 days to pay outstanding invoices, which is a long time! This business needs to get busy collecting its dues from its customers.
If you haven't already, why not check out Emily's earlier posts in the series, where she explains how liquidity ratios and the break-even point can help you to review the health of your business.
*Remember that as this is an average figure, it may be distorted if, for example, you received a big order from a customer just before the end of the year