What are debtor days?
Debtor days is a term used when looking at how quickly you collect payments from those who owe you money. The more days it takes for payment, the higher the debtor days.
Comparing your debtor days to your standard payment terms (as set out in your own Terms of Business) will give you an indication of how efficient your business is at generating cash. For example, if your standard payment terms are 14 days but your customers take on average 28 days to pay, your debtor days are twice as long as you have set out in your own Terms of Business which could seriously impact your cash flow.
In this example you are, effectively, offering excess credit to customers who are not paying you for that privilege. This leaves your business out of pocket and makes it more difficult to plan your own future cash flow. High debtor days can also increase the risk of a customer not paying you at all, as the longer you give them to pay the more chance there is of something going wrong in their business that then impacts you.
It is therefore a good idea to reduce payment times whenever possible and there may be some things to consider below in order to reduce debtor days:-
- Know your customer/client and build a relationship.
- Run a credit check on new clients. If you provide credit to customers, view their credit report. For those with bad credit you may wish to ask for prepayment.
- Telephone calls go a long way as you can keep a rapport with your customer/client but keep a note of what date and time you called, what was discussed and who you spoke with as you may need this to back you up later if payment is still not received.
- Make payment terms clear and issue straightforward invoices, detailing payment terms and send your invoice promptly by email and by post.
- Try not to waive your payment terms or extend them – stick to them as best you can. Word of mouth will mean other businesses will know not to mess you around.
- Charge penalties (where appropriate) for late payment and make sure this is clearly stated on the invoice and have this incorporated into your Terms of Business and agreement or contract.
- Be flexible with how you accept payment from customers.
- Make sure your invoices are correct when sending them out. Errors on invoices can take a long time to correct.
- Consider offering a discount for early payment of your invoice. We understand that a lot of customers do actually like to clear invoices sooner rather than later in order to cut their admin so a discount (or other incentive) may work and this not only encourages further business but also gives your cash flow a boost.
- If all else fails and you cannot get anywhere with the payment, pass over to us as soon as possible!
Overall, most businesses know what works for them and what doesn’t, but if this is a concern to you in the current climate the above are common sense suggestions to think about in order to keep your debtor days down to a minimum.
Else Solicitors aim to be an extension of your credit control team. If you would like to discuss any of the above or ask us to assist, please contact Laura Charles on 01283 526200 or email firstname.lastname@example.org.