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# Debtor Days Calculator

Debtor days also known as debtor collection period measures the average number of days it takes to collect payments after sales have been made. It is generally determined on a monthly, quarterly and/or annual basis.

 Debtor Days

## Debtor Days: A step towards better debt management

A business might suffer a loss, not because it is not making enough sales, but simply because of the lack of debt management. The Debtor days ratio is a tool that will help you determine the average number of days it is taking for your company to collect its receivables.

## Breaking down the Debtor Days calculations

Due to the cash value in any business, it becomes essential to collect receivable as soon as possible. If cash is collected quickly it can be turned it into an investment to generate more revenue.

The following formula is used to calculate debt days:

Debtor days = (a/b) x c
• a: Total account receivables
• b: Total revenue in credit sales
• c: Number of days in a year

The debtor days ratio shows the importance of 'time value of money'. The time spent waiting for the money to be collected is the money wasted. This means that if you receive a payment today, you can reinvest it today, and start making profits immediately, rather than receiving the same amount on a later date.

A high "debtor days ratio" tells you that a company is selling its product on credit and taking a long time to collect its receivables. This may lead to cash flow problems.

On the other hand, a low value of debtor days indicates that a company takes fewer days to collect its payments. It is worth noting that the debtor days ratio can provide an interesting insight into a company's cash flow.

## How to use the Debtor Days calculator

The following entries are required for the calculation:

• Total receivables: Enter the total amount that is receivable in your books for the entire financial year.
• Revenue in sales: The total amount of sales done on credit in a year. This is to be noted that sales made in cash are not considered for the debtor days calculation. Only the revenue that is generated by selling the products on credit is to be factored in here.

On the basis of the above entries the calculator will provide you with the debtor days; the number of days it takes for your company to turn its sales into cash. It is an online tool that can support your business in many ways:

• The calculator is very easy to use, it requires just a few inputs to provide you with important data that can be saved for future references.
• It can also be used to compare the Debtor days of the same company on a historical basis.
• Comparison can also be made by other companies, given they belong to the same industry.

Additionally you can use the debtor days ratio to check many factors that impact a company's financial condition, such as:

• The amount of sales a company has made during a specific period of time.
• The Debtor days ratio will be high if your customers are quick in paying.
• It will also reflect on the competency of your collection team. If the ratio is running too high, you may need to manage your collection department in a better way.
• Too high or too low debtors ratio. both are not good for your company. Your company should maintain customer satisfaction by providing an appropriate amount of credit limits and timelines for repayment.
• The higher ratio can also mean that the company is not selling their products on credit to credit worthy customers. So the ratio will help you see if you have a good customer base.

## Limitations of using the debtor days formula

Like any other metrics that are used to assess the efficiency of a business, Debtor days ratio also comes with some limitations, the following should be noted when weighing the ratio calculated against other quantified components of the company performance:

• Company size: Companies of different sizes have different capital structures that influence the debtor days greatly. So when making the comparisons you should remember to use it only for the companies that belong to the same size. This is also applicable in the case of different industries.
• Sales Trends: Additionally, fluctuating sales can affect the debtor days ratio. This is true for businesses that are affected by seasonal sales. A sudden increase in sales volumes can decrease the debtor days value irrespective of other factors.

Despite the considerations that can distort the ratio, the debtor days ratio provides a really helpful insight when considering debt management when used carefully along with other available metrics to gauge the business efficiency.