Debtor Days – It’s About More Money In Your Bank Account
The thing to remember about Debtors is that it is interest free money you are lending to your customers. The Debtor Days Ratio (DDR) is an easy way to track this.
There is more than one formula that you can use to calculate the debtor days. To be more specific, the first version of the debtor days calculates the debtor days ratio by dividing the Trade Debtors (not the whole debtor balance, just the trade debtors) with the Credit Sales (excluding cash sales which are paid immediately) and multiplying the result with 365 (number of days in a year).
Debtor Days= (Trade Debtors/Credit Sales)*365
However, the above formula assumes that information about the credit sales will be available to you, often this not easily & quickly available from the books. Therefore, if you don’t the credit sales figure available, we use the following formula:
Debtor Days Ratio = (Trade Debtors/Revenue)*365
This second ratio will give you a smaller number of days that a company needs to turn its’ sales into cash (showing a picture that is better than the reality). Because this second formula includes cash sales & not just credit sales, by including total sales & not just credit sales.
Finally, you will also see the debtor days ratio being calculating the average of the opening & the closing debtors for the year.
A DDR Example
Let’s use some numbers to show you how it works:
Company A : Sales £5m & Trade Debtors £350k
Company B : Sales £3m & Trade Debtors £50k
The debtor days ratio for Company A is:
Debtor Days Ratio : (350,000/5,000,000)*365= around 26 days (£13,698 per day)
However, the debtor days Company B is :
(150,000/3,000,000)*365= around 18 days (£8,219 per day)
DDR Analysis & Interpretation
The above shows that Company A allows a higher number of days for its’ customers more time to pay, on average 8 more days for customers.
This equates to £109.5 less cash in their bank account, (£66k using Company B’s numbers).
Company A is better at collecting cash, so has more money in the bank.
Why the Ratio is useful
By calculating, analysing & interpreting the debtor days ratio, you can gain insight about:
- The company’s efficiency into translating sales into cash.
- The company’s ability to maintain a Cash to Cash or Working Capital Cycle.
- The possibility of trade debtors becoming bad debts. Because long overdue debtor balances may be potentially bad debt or disputed amounts.
When comparing more than one company at the same time, take into account, the company & the industry it operates, because companies from different industries can have very different debtor days ratios.
Debtor Days Calculator
Our calculator below is very straightforward, why not fill in the boxes using your number to get your debtor days!
Enter your total debtors (A)
Enter your sales (B)
Your debtor days ratio is A/B times 365. You could divide your Debtors by DDR to see how much less money you have per day in your bank by lending it to your customers.
If this resonates with you or you find it interesting, why not book a meeting to see what else we can do to help you?
