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Accounting Ratios - Debtor Days

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Debtor Days

The debtor days ratio focuses on the time it takes for trade debtors to settle their bills.

The ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers.  The efficient and timely collection of customer debts is a vital part of cash flow management, so this is a ratio which is very closely watched in many businesses.

The formula to calculate debtor days is:

Formula for calculating debtor days

Applying this formula to some example data:

 

20X2
£’000

20X1
£’000

Revenue

21,450

19,780

Trade receivables

4,030

3,800

Debtor days

68.6 days

70.1 days

The data above indicates an improvement in debtor days – i.e. debtor days have fallen.  That means that the business is converting credit sales into cash slightly quicker, although it still has to wait for an average of over two months to be paid!

The average time taken by customers to pay their bills varies from industry to industry, although it is a common complaint that trade debtors take too long to pay in nearly every market.

Among the factors to consider when interpreting debtor days are:

  • The industry average debtor days needs to be taken into account.  In some industries it is just assumed that the credit that can be taken is 45 days, or 60 days or whatever everyone else seems (or claims) to be taking
  • A business can determine through its terms and conditions of sale how long customers are officially allowed to take
  • There are several actions a business can take to reduce debtor days, including offering early-payment incentives or by using invoice factoring

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Related study notes

INTRODUCTION TO ACCOUNTS
Introduction to Accounting
Users of Accounts
Accounting Concepts and Conventions
Stakeholder Theory
Characteristics of Accounting Information
Alternatives to Profit Maximisation
Maximising the Value of a Business
Non-financial Objectives of a Business
Comparison of Financial and Management Accounting

BUDGETING
Financial objectives - intro
Financial objectives - key measures
Introduction to Business Planning
Introduction to Budgets
Purpose and Role of Budgets
Incremental Budgeting
Zero-based Budgeting
Variance analysis
Budgeting limitations

COMPANY FORMATION
Introduction to Business Organisation
Forming a Company
Advantages of Incorporation

FINANCIAL MANAGEMENT
Introduction to Financial Management
Introduction to Working Capital
Working Capital Needs of Different Businesses
Working Capital Cycle

SOURCES OF FINANCE
Managing Business Cash Flows - An Introduction
Introduction to Raising Business Finance
Sources of Finance for SMEs
Overdraft Financing
Business Angels
Introduction to Venture Capital
Sources of Equity Finance
Rights Issues
New Share Issues & Flotations
Intoduction to Leasing
Leasing - Advantages & Disadvantages

FINANCIAL STATEMENTS
Introduction to Financial Accounting
Income Statement
Profit quality
Balance Sheet
Current assets
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