What Are Debtor Days And Why Do Businesses Use Them?

It is important to fully understand debtor days and the importance of them within a business context. But what are debtor days? We explore the ins and outs of this term so you can thrive in business with a fully informed opinion.  Whether it is pay day loans, bank loans, or any other type of lending transaction, debtor days are applicable within all borrowing contexts.

What are debtors?

When a creditor invoices a customer, or a debtor, they will usually have a certain amount of time top pay the business back. The customer becomes a debtor once they’re invoiced for a product or service, with an agreed payment term to pay the amount back by.

What are Debtor Days?

Debtor days are linked to a debtor number. What this basically is, is a ratio measuring how quickly it takes for a debtor to pay a business back. Debtor days show the average number of days it takes a company to receive said payment from the invoices issued to them.

The debtor ration tells a business it takes a debtor to pay a business. The longer it takes a company to receive their owed payment, the greater number of debtor days will be recorded.

If a business has a high number of debtor days, this will mean that your business has less cash available to make use of. Issues with this include elements such as limitations to investments, which can stunt your growth. You may also be more likely to go into your overdraft or take out a loan to pay such obligations.

How To Handle Your Debtor Days

Comparing your debtor days against your payment terms may be a good management tactic. If you have terms for 30 days, for example, and debtor days of 60, this will mean that it will take twice as long for debtors to pay you than it should. 

Debtor days for a company are driven by a wide range of factors. The industry norm for how long it should take invoices to be paid off can play a huge factor. Those who give a discount on early paid invoices can also have an impact on debtor days as this will encourage early payments being made. It is important to weigh up the benefit of having cash in the bank against the potential monetary loss of discounting these invoices.

The Benefits of Debtor Days for Businesses

In the current climate, it is natural, and evidently inevitable, that your business may be paid at a slower rate. Bearing this in mind, it can be useful to track just how your debtor days have altered, so you can understand the potential impact on your business. Acquiring a transparent outlook of both debt and cashflow will allow you to put your finance team in the most insightful position attainable. This can allow you to spot issues fast, enabling you to take action and keep the company’s cash in a positive position.