Show me the money (Debtor Days)

Do you know how to control how quickly your customers are paying you?

Following on from last week’s current ratio post, I’m now looking at Debtor days; one of the most practical measures for understanding the cash coming into your business. You’ve probably heard someone in your finance function mention that debtor days have gone up or down but perhaps haven’t understood what this means in relation to your cash flow.

Debtor Days: The average number of days from raising an invoice to a customer to the funds hitting your bank account, so, how long does it take for your customers to pay you? If debtor days goes up, then you’re not being paid as quickly as you were.

What this means for cash flow is that you’ve supplied a good or service, and you may be out of pocket for the privilege or you may have another invoice for materials or labour coming in that you know you’ll need to pay. If you haven’t had the money in on time from your customer, then how will you pay for the supplies you’ve used or will use for the next customer?

Taking it one step further, you can review your debtors by how long their money has been owed to you. If you’ve got a pocket of customers sitting at 90+ days, you can target your chasing on these or consider if there’s a debt to write off, move on and screen these customers out if they’re not good for business.