During such turbulent economic times, staying on top of your debt collection is more important than ever. To better understand their situation, most businesses use debtor days – a calculation that measures, on average, how long it takes them to get paid by customers. The basic rule of thumb is to keep your debtor days as short as possible, while extending your creditor days as much as you can.
How do I calculate debtor days?
Although there are quite a few different ways to do this, some more complex than others, most people tend to use a simple but trusty formula.
Debtors days = current debtors owing / annual sales * 365
For instance, if you make £300,000 in annual sales and you have a debtor owing of £45,000, your debtor days are 55 (£45,000 / £300,000 * 365).
Now, whether this is high or low depends on your payment terms. If your terms ask for payment within 14 business days, this number is a red flag. Having your cash stuck with your debtors for way too long is an issue that needs to be solved – in other words, you need to reduce your debtors days.
Ways to reduce debtors days
So, how do I make my clients pay me faster, you ask? Well, it may be tricky, but there are some common practices businesses use:
- Review your Terms of Trade. Ideally, your payments should be made within a week of the customer receiving your invoice. You should not allow payments on a monthly basis.
- Keep your statements to only two columns. Use one column for current and one for overdue – columns that show 90 days and/or 120 days overdue let people think this is acceptable.
- Ask for deposits before starting work. This is especially important if the payment is a large sum of money (e.g. you are designing a new website for a company, which will take a while).
- Invoice progressively. This will help you see that you are not getting paid early on.
- Use accounting software that sends automated email reminders. You can set the software to send a gentle email reminder saying the invoice is due for payment in two days time, then another to say it’s due payable today, and then a series of polite but firm reminders if it’s been overlooked. The software will keep a record of the reminders.
- Phone your overdue debtors early on. Sometimes it’s more effective to contact your clients reminding them to pay you a long overdue debt. It’s not a pleasant call to make, but it may be necessary. Keep an accurate record of calls and promises to pay.
- Have a designated debt collector. This can either be outsourced, or just a different member of your team, based on your budget. Either way, it’s extremely helpful to have someone managing your debt collection, so it doesn’t get out of hand.
- Don’t keep working for non-payers. You need to draw a line somewhere – if you keep doing work without getting paid, they will just keep putting off your payments.
- Offer discounts for upfront payments. This works for a lot of companies and can actually save you money and time in the long-run.
- Provide more payment options. The most common ones are credit card, direct debit or automatic payment. If they have payment options given to them, there are no excuses.
If you want to calculate what the impact of reducing your debtors day would look like (even if it’s just 1 day less) there is an easy formula for that as well. Simply divide your annual sales by 365 to calculate your daily sales and then calculate the impact of reducing your debtors days by different amounts.
For instance, if you managed to reduce your debtors days from 55 to 35, you would now have over £16,400 more in cash ((55-35) / 365 * £300,000 = £16,438). Once you calculate the exact numbers, you realise what a big impact this debt has to your business right now.
You’re not a bank (unless you are…), so don’t let your customers treat you like it. Make sure you are getting paid as soon as possible and have more cash available in your business.
If you need further help or advice reducing your debtors days, feel free to contact us! Here at ASfB (Accounting Services for Business), we specialise in helping our clients with all things business and finance.
Call us on 01202 755600 or drop an email to firstname.lastname@example.org to get in touch!