Debtor days – an introduction
As a fast-growth business, keeping track of your financial metrics is vitally important. Debtor days helps you monitor the efficiency of your credit control systems and the cash flow within your business. We will look at what debtor days are, why they are essential, how to calculate them, and what good debtor days look like for different sizes of businesses.
What is debtor days?
Debtor days, also known as days sales outstanding (DSO), is a financial metric that measures the average number of days it takes for a business to collect payments from its customers after a sale has been made on credit. It serves as an indicator of the efficiency of a company's credit and collection policies, as well as its cash flow management.
Why is debtor days so important?
Debtor days is crucial for fast-growth businesses for several reasons:
- Cash flow management: Faster collection of accounts receivable creates better cash flow, which is essential for meeting operational expenses and reinvesting in business growth. This becomes even more important for a business that is in a cash burn position.
- Credit control: Efficient credit management reduces the risk of bad debts and potential losses. Additionally, you can obtain more favourable funding whether this be RBF (revenue-based financing) or traditional debt.
- Business reputation: Companies with low debtor days are seen as more financially stable and reliable, making it easier to secure financing and forge partnerships.
What is a good debtor days?
There’s no one-size-fits-all answer to what constitutes a good debtor days number, as it can vary depending on the industry and business size. However, a lower debtor days number generally indicates better credit control and cash flow management.
It’s essential to remember that this metric can vary depending on business size and specific circumstances. Aiming for a lower debtor days figure generally implies better credit management and cash flow, but it’s crucial to compare your business to other industry benchmarks and competitors to determine what constitutes a good number
Here’s a snapshot of debtor days of some well-known businesses:
- Amazon: The e-commerce giant reported debtor days of around 18 in 2020. This relatively low figure indicates Amazon's efficient (or powerful) credit management and cash flow, which has contributed to its impressive growth.
- Microsoft: In 2020, Microsoft reported debtor days of approximately 36. This figure is reasonable considering the nature of their software and service offerings, where longer payment terms are often negotiated with clients.
- Procter & Gamble: As a consumer goods company, P&G's debtor days was about 31 in 2020. This figure falls within the typical range for the industry (c. 30-45 day), reflecting effective credit control in managing its accounts receivable.
- Tesla: In 2020, the electric vehicle and clean energy company Tesla reported debtor days of around 12. This low number indicates Tesla's effective cash flow management, which is crucial for supporting its ambitious growth plans.
- Coca-Cola: The multinational beverage corporation Coca-Cola had debtor days of around 38 in 2020. This figure is within the expected range for the industry, showing that the company efficiently manages its accounts receivable.
What does debtor days look like?
How do you calculate debtor days?
The formula to calculate debtor days is:
Debtor days = (Accounts receivable / Sales) x 365 days
You may wish to segment your debtor days, for example an e-commerce business may exclude POS transactions and just focus on trade sales which are on credit terms, allowing you to identify issues in your credit control process.
In this calculation we are looking at sales for 12 months and hence the formula is x 365 days. If you were looking at debtor days for a specific month, you can take the monthly sales and then multiply by the number of days in the month.
Debtor days worked example:
If a business had sales of £375,000 for the last 12 months and has accounts receivable of £50,000 at the end of the current period, the calculation would be as follows:
Debtor days = (£50,000 / £375,000) x 365 days = 49 days
Conclusion
Debtor days is a critical metric for fast-growth businesses to create efficient credit control, cash flow management, and overall financial stability. By monitoring and managing this metric, businesses can make informed decisions, reduce risks, and maintain a strong reputation in the market. Remember, a lower debtor days figure generally indicates better credit management, but what constitutes a good number will vary depending on the industry and size of the business. Keep an eye on your industry benchmarks and strive to maintain debtor days as low as possible to build sustained growth.
