What are Debtors Days?

Debtors days are often referred to by accountants as an important Key Performance Indicator (KPI) for your business. But what is debtors days and why is it important for your business.

Debtors days is calculated as follows:

Debtors / Annual Sales x 365

The result will give you the average number of days that your total debtors are outstanding.

Why are Debtors Days Important?

Debtors days gives you an indication of your collection of debtors. By reducing your debtors days, through better collection practices and terms of trading, it will improve your cashflow.

Lets look at an example.
Say a company has sales of $1million per year and debtors days of 60. Its debtors balance at the end of the year would be $164,583 ($1,000,000 / 365 x 60). If the reduced their debtors days to 45, then the debtors balance would be $123,287. The difference of $41,296 would be cash in the bank.

As a KPI, the number is not important in itself (except as a warning if it is particularly high) but the movement in debtors days over time is important as it can represent:

• Changes in trading conditions. An increase in debtors days could show financial stress amongst your clients.
• Effectiveness of collection procedures.
• Changes to trading terms.