Late payments have long been a challenge for UK businesses, and recent rises in inflation have only increased the pressure.
According to research by Xero, small businesses waited an average of 30.4 days to be paid in November 2022 – up from 28.8 days a year earlier.
Consistently receiving late payments is frustrating, to say the least, and can have serious impacts on your cashflow.
To take control of the situation, you need to have a good grasp of your data and know exactly how long it takes for your customers to pay you.
Measuring debtor days is one way to do that.
What are debtor days?
In short, debtor days refer to the average number of days it takes to receive payment from your customers.
It’s important to stay on top of this information because late or unpaid invoices can have serious knock-on effects for your cashflow.
If you’re waiting a long time for customers to pay you, you’ll have less cash available to invest in your own business and pay your own suppliers and staff. This could make you more vulnerable to financial shocks – which is especially important to consider during difficult economic times.
How to calculate debtor days
To start with, you’ll need the following figures to hand:
- accounts receivables (the total owed to you by your customers)
- total credit sales (the total you’ve invoiced your customers during the period you’re looking at).
To calculate your debtor days, you divide your accounts receivables by your total credit sales and multiply that amount by the number of days in the period. This might be on a monthly, quarterly or annual basis.
For example, if you were looking at debtor days for one year, you would use the following formula:
Debtor days = (accounts receivable / annual credit sales)*365
If you measure debtor days regularly, you can turn that data into a graph demonstrating how they change over time. If it’s taking longer for your customers to pay you, for instance, you’ll be able to spot that trend and take action to deal with it before it becomes a bigger problem.
How to improve debtor days
While you’ll never be able to completely control how quickly your customers pay you, there are a number of steps you can take to improve the situation.
- Clear and effective payment terms. Make sure you set out clearly defined payment terms before you start a piece of work, and that you’re happy that these terms will encourage fast payment. You might even choose to shorten your payment deadline if it’s currently longer than you’d like.
- Improve your invoicing. There might be adjustments you can make to your invoicing system, so you can invoice promptly, clearly and correctly every time to avoid delays. (Accounting software like Xero can help with this.)
- Chase up debtors periodically. Sometimes, payment is simply low on your customers’ to-do lists. Make sure they’re aware of the outstanding debt by sending regular reminders. Again, this is something invoicing software can do for you.
- Make it easy to pay. Look to remove as many barriers as possible that might be preventing your customers from paying you. One way to make the process smoother is by including a link to an online payments portal as part of your invoice.
- Incentivise early payment. You could also consider implementing early payment incentives such as discounts to encourage customers to pay you sooner. On the flip side, late payment penalties for those who miss the deadline could help to discourage debtors from leaving it too late.
We help agencies and SMEs to understand and boost their cashflow by collecting and analysing the right data. Keep an eye on our blog for more tips on understanding your data – or get in touch to talk about your business.