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Understanding The Importance Of Debtor Days

Understanding the importance of Debtor Days

Just as a thermometer is the indicator of a fever in your body. So too are Debtors Days in your business.

Key Performance Indicator is a term we use a lot in business. KPI’s as they are commonly known are a group of results that allow you to measure if your business is healthy now and if it will remain healthy in the future.

If cash is the lifeblood of your business, Debtors Days fill the veins. Debtors Days are all about how quickly you get paid from your customers and therefore how regularly the cash is filling your businesses veins.

What is the magic number you are looking for?

Every business is different so you’ll need to work out how many numbers of days is the correct amount for your business. Once you’ve got your magic number you need to monitor the number every month to see how you are tracking.

Things to consider in working out your Debtor Days target.

  • When do you have to pay for your materials?
    • Cash on pick up
    • 7-day trading account
    • 30-day trading account
  • When do you pay yourself and/or your team
    • Drawings from the bank account as and when you need it
    • Drawings from the bank account, set amount each week/fortnight
    • Pay run cycle for your team every week/fortnight
  • Do you have business expenses/overheads to pay
    • Rent
    • Power
    • Motor Vehicle running expenses (fuel)
    • Licenses and registrations
    • The list goes on

Your business needs a certain level of cash in-flows to keep up with the cash out-flows and the in-flows need to be timed to coincide with when the out-flows occur. Otherwise, there won’t be sufficient funds in the bank account to do withdrawals.

An example of creating a target

I started my business with no money, simply sold my time for money. I lived hard for a few weeks and banked the profits I made which gave me a $3,000 buffer in my bank account to pay for materials, subbies, employees, myself before my customer paid me for my next job.

Even though my bank account will go up and down, I always need to make sure it returns to my float amount so that I can stay “afloat”.

Examples of cash flow and Debtor Days

 Example One:   You invoice the customer at the end of the job (Debtor Days = 5days)

The old way of handling cash flow was to invoice the customer and then sit back and wait for the payment. You only work for good people so you know they’ll pay you.

Example Two:   Get a kick start payment and request payment at job end through a payment gateway (EFTPOS) (Debtor Days = 0)

Cashflow is vital so you should do anything to speed it up. The best way to utilise profits is to buy new tools that make your jobs more efficient rather than leaving profits in the bank so that you have money to pay for day to day business needs.

In this example, we asked the customer for a kick start payment which in this example is around the value of the materials you had to pay in cash.

At the end of the job, issued an invoice to the customer and at the same time processed a payment through an EFTPOS terminal.

Doing it this way meant that your profits were in the bank straight away and you had funds to pay for the next jobs materials.

What are your Debtor Days month by month and as an average over the year

Depending on your business type and how you operate, your Debtor Days may be anything from 2 days to 60 days.

Ensure you know this information every month and troubleshoot ways to reduce the number.

How to reduce debtor days

For residential work:

  • Kick start payments
  • Offer EFTPOS at the end of the job

For commercial work:

  • Utilise electronic tools – invoice immediately before you leave the site or definitely later that night. The faster you get your invoice in the faster you get paid!
  • Always ensure that all your information is on your invoice. This includes your email address so that the customer can email you a remittance and your bank account details so that they can pay you.
  • Utilise electronic tools – have Xero on your phone and match customer payments daily. This will allow you to utilise the automatic “send reminder” function in Xero to either warn a customer that an invoice is nearly due or send them a reminder if they haven’t paid you on time.
  • Send statements on the first day of every month.
  • Form a good relationship with the accounts payable clerk and call them straight away when invoices aren’t paid on time.