Debtor Days Ratio

What is the Debtor Days Ratio?

The debtor days ratio shows the average number of days your customers are taking to pay you. It is calculated by dividing debtors by average daily sales. It is sometimes referred to as days’ sales in accounts receivable.

What is the Formula for Debtor Days?

• Debtors is given in the balance sheet and is normally under the heading trade debtors or accounts receivable.
• Sales is found in the income statement.

How is Debtor Days Calculated in Practice?

Example 1

As 365 days (1 year) is used in the formula you must use the annual sales figure for sales.

```Annual sales = 200,000
Year end debtors = 20,000

Debtors Days Ratio = 20,000 / (200,000 / 365) = 36.5 days

It takes the business on average 36.5 days to collect debts from customers.
```

Example 2

If you are using sales for a different period then replace the 365 with the number of days in the management accounting period. For example if using management accounts (30 days), then the calculation is as follows.

```Monthly sales = 18,000
Month end debtors = 19,000

Debtors Days Ratio = 19,000 / (18,000 / 30) = 31.7 days
```

What does the Debtor Days Ratio Show?

If your debtor days are increasing beyond your normal trading terms it indicates that the business is not collecting debts from customers as efficiently as it should be, or perhaps terms are being extended to boost sales. For example if your normal terms are 30 days and your Debtor Days ratio is 60 days the business on average is taking twice as long to collect debts as it should do.

Any upward trend in the Debtor Days ratio means that an increasing amount of cash (possibly from overdrafts) is needed to finance the business, this can be a major problem for an expanding businesses.

Useful Tips for Using Debtor Days

• The Debtor Days should be the same as your Terms of Trade with customers.
• A cash business should have a much lower Debtor Days figure than a non-cash business.
• Typical ranges for Debtor Days for a non-cash business would be 30-60 days.