Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability.
Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cash flow gap you might experience and the impact on cash flow planning and budgets.
How to Calculate Debtor Days
(Year-end receivables amount ÷ annual sales) x 365 days = average debtor days.
Here’s an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is.
Trade debtors at 30 June 2019 = $35,000
Annual sales for 2019 = $478,000
(35,000 ÷ 478,000) x 365 = 26.7 days
With this information, she can either alter her cash flow planning according to the actual time-frame or take steps to reduce the average number of debtor days.
What can you do to reduce the payment times?
- Update your payment terms – and make sure the terms are clear on every invoice issued. Don’t forget to include bank details on the invoice!
- Regular admin – schedule a regular time for your own administration and get your invoices out promptly.
- Send to the right person – when you send invoices, make sure you address the email personally to your contact. Send the invoice to multiple addresses if possible, for example, your contact and the accounts department.
- Use technology to your advantage – use automated invoice reminders to notify customers when an invoice is about to be due and then when it is overdue. Do not wait to send notifications manually, let the software do it as soon as the invoice is a day overdue.
- Make it easy for your customers – list the payment terms, for example, due in 14 days, as well as the actual due date.
- Provide incentives for early payment – for example, a 5% discount if paid within five days.
- Offer several payment methods for clients – make it easy to pay by adding an online option such as credit card or PayPal.
- Offer instalment payment plans – over a mutually agreed period. This allows you to plan for part payments, rather than being inconvenienced by the whole invoice being paid late.
- Do not offer unlimited credit to customers – make sure your terms and conditions include the right to refuse further supply if invoices are outstanding. Request part or full payment before supplying more goods or services.
- Talk to your suppliers – Maintain good relationships and clear communications so they are more likely to help you if you need an extension on your bills. If possible, renegotiate supplier terms that suit your business cash flow.
During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website.
Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cash flow. We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cash flow during difficult periods.