Cash flow can kill your business, especially if you are selling on credit terms. So, one of the key ratios to understand in helping with your cash flow is understanding debtor days.
If you’re not sure what debtor days are and why they’re important, follow my video or read below.
Calculating your Debtor Days
So, the calculation is we divide your Trade Debtors figures or Accounts Receivables, whichever term you use; they’re both the same and calculated by the following formula:
Debtor Days = Trade Debtror / Turnover X 365
This will tell you how many days your customers take to pay you.
Selling on Credit Terms
Selling on credit terms means that you are setting a time limit for your customers to settle their payments.
You need a clear overview of whether your customers are paying you within their credit terms or taking longer.
Because if they are not paying you on time, they are getting interest-free money from you.
So, do you know your debtor days?
With debtor days, this is money that is yours for work you’ve done and is in your customer’s bank account. I know you need to sell on credit terms. Otherwise, you won’t get the sale, but you must aim to get this money as soon as possible.
You can encourage your customers to pay early with extra incentives, which could significantly impact your cash flow.
If you have regular or repeat customers, how do you make sure that they don’t take too long to pay? If your customers keep extending their payment time, you have to fund your debtor days because your accounts are done on an accrual basis, meaning income is recognised in your profit loss account when the invoice is out there, not when it’s paid.
Ideally, you want to get paid as soon as possible as you also have bills to pay, and you need money to grow your business further.
Are your customers following your credit terms or paying later than agreed?
Everyone likes a bit of a deal, but you want to make sure your customers are paying you. Because if you can’t pay your team, you can’t pay your subcontractors, you are going to hit problems because you’re going to run out of cash. So, make sure that your trade debtors are up to date and that you have regular reviews.
When you’re chasing your customers, you can send out regular statements, which I think is really important; you can set automation to do this in your accounting software, such as Xerom, and also follow up with a phone call.
So they know it is time to pay. Because we all know in small businesses, sometimes he or she who shouts loudest gets paid first.
What is your current cash flow within your business?
Are you having this as one of your KPIs to measure to make sure everything is as lean as possible?
You want your money to sit in your bank account instead of your customers.
I hope this article was helpful, and if you have any questions, feel free to book a free discovery call; click my Calendly link below, and I promise there will be no pushy sales pitch.
