It’s important to stay on top of your debt collection to free up cash. Establishing how long it takes you to get paid is the first step, but how can you measure this?
Debtor days measures, on average, how long your customers take to pay you. While there are many complex formulas to accurately calculate this, a nice easy formula is: current debtors owing / annual sales * 365.
For example, if you have annual sales of $450,000 and debtors owing of $80,000, your debtor days are 65 ($80,000 / $450,000 * 365). If, in this example, your payment terms specify payment is expected within 14 days, then you have a real problem and your cash is locked up in your debtors much longer than it should be.
Reducing your debtor days will immediately free up cash. So, how can you reduce your debtor days?
Review your Terms of Trade. Payments should be made within 7 days of the customer receiving the invoice, not on the 20th of the month following.
Have statements with only two columns. One for current and one for overdue. Columns showing 90 days and/or 120 days overdue let people think this is acceptable.
Ask for a deposit before you start work.
- Invoice progressively so you can see you’re not getting paid early on.
- Get on the phone early to your overdue debtors.
- Use an outsourced debt collector, or at least a different member of your team to follow up payments.
- Don’t keep working for non-payers.
- Offer a discount for upfront payment.
- Offer payment options - credit card, direct debit or automatic payment.
To see the impact of reducing your debtor days, even by only 1 day, simply divide your annual sales by 365 to establish your daily sales level. You can then use this figure to calculate the impact or reducing your debtor days by different amounts.
To demonstrate with the above example, if you reduced your debtor days from 65 to 40 - still well beyond your payment terms - you’d have over $30,000 more cash ((65-40) / 365 * $450,000 = $30,822).
Don't let your customers treat you as their bank! Ensure you’re getting paid as soon as possible. Get in touch to find out how we can help you reduce your debtor days, so you have more cash available in your business!
Get in touch with the team at Beyond Your Numbers to book a time to find out more about how we can help you understand your debtor days better.