Education

What are debtor days and why do businesses use them?

27 Jul 2021

Debtor days refers to the time a business waits to be paid by their customers which can be anything from 10 to 90 days, depending on the size of the business and the product or service they trade. Debtor days are usually compared to stock days which refers to how long you have stock for tying up cash flow until it’s sold.

debtor days caluclations

Businesses use debtor days as a mark for how long they will then pay their suppliers for the stock, this is called creditor days. A business will use a combination of debtor and creditor days to calculate their working capital cycle and how much cash flow they’ll need to have to carry on trading in the meantime.

The number of debtor days is down to the business to set within their payment terms. If the debtor days are too long, i.e the payment term is as long as 60 or even 90 days before you’ll receive payment. 

What are debtors? 

When a business (the creditor) invoices a customer (the debtor) for something and they have a certain amount of time to pay it back. They become the debtor which refers to the entity (usually customers) who owe businesses cash for a product or service they provided. 

They automatically become a debtor once they’re invoiced for the product or service and they’ll then have a payment term they have to pay back the amount by.

How businesses make debtor days calculations

Every business will decide on its debtor day payment terms, depending on the calculations they’ve done. The timeframe for debtor days will be different for businesses depending on a number of factors like size of the company and elements including:

  • If they offer early payment discounts- Businesses can offer their customers incentives like early payment discounts if they settle their invoices earlier than the payment terms. If they do, the cost of discounts is then considered

  • Invoice errors- If there are any errors on an invoice and it gets rejected, it can take a long time for these to be corrected before a business gets paid again

  • The type of industry- Depending on the type of industry the business is in, customers may be used to paying off their invoice after a certain number of days, despite there being any payment terms in place. This is particularly common when the customers are quite large or if businesses have multiple debtor accounts. Businesses will need to consider applying for working capital such as invoice finance, to help bridge the gap until they’re paid

  • Credit practices- If a business offers excess credit to customers who aren’t able to pay it back, the debtor days will increase and can lead to more bad debt or having to write it off completely. This leaves businesses heavily out of pocket which impacts their own profits.

If you want more information about debtor days or how your business could apply for funding to bridge the gap, why not speak to our team today and find out about the funding options available for your business. 

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