How long is it taking you to get paid? How do you measure this? What strategies can you adopt to get paid faster?
Debtor days is used to measure, on average, how long your customers take to pay you. While there are many complex formulas to accurately calculate this, a nice easy formula is:
Current debtors owing / annual sales * 365
For example, if your annual sales amounts to $450,000 and your debtors owing is $80,000, your debtor days are 65 ($80,000 / $450,000 * 365).
If your payment terms specify payment within 14 days, you have a real problem and your cash is locked up in your debtors for longer than it should be. Reducing your debtor days will immediately free up cash.
To work out the impact reducing your debtor days by 1 day will have on your cash, simply divide your sales for the year by 365. You can use this formula to calculate the impact of reducing debtor days by any number of days.
For example, if you reduced your debtor days to 40 – still well beyond your payment terms – you’d have over $30,000 more cash (25 / 365 * $450,000 = $30,822).
So, how can you reduce your debtor days? Here’s some essential ideas to consider:
- Review your Terms of Trade with your customers. Payments should be made within 7 days of the customer receiving the invoice, not on the 20th of the month following.
- Have statements with only two columns. One for current and one for overdue. Columns showing 90 days and/or 120 days overdue let people think this is acceptable.
- Ask for a deposit before you start work.
- Invoice progressively so you can see you’re not getting paid early on.
- Get on the phone early to your overdue debtors.
- Use an outsourced debt collector, or at least have a different member of your team following up payments.
- Don’t keep working for non-payers.
- Offer a discount for upfront payment.
- Offer payment options – credit card, direct debit, automatic payment.
- Ask us for 10 more ideas!
Don’t let your customers treat you as their bank! Ensure you are getting paid as soon as possible. Get in touch so we can help you reduce your debtor days so you have more cash available in your business!
This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.