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. Additionally it is sometimes referred to as days’ sales in accounts receivable.
What is the Formula for Debtor Days?
The terms used in debtor days formula are as follows.
- Firstly debtors is given in the balance sheet and is normally under the heading trade debtors or accounts receivable.
- Secondly sales is found in the income statement.
How is Debtor Days Calculated in Practice?
Example 1
It is important to realize that 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
As can be seen, in this case it takes the business on average 36.5 days to collect the outstanding amount 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
In this case it takes the business on average 31.7 days to collect the outstanding amount from customers.
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.
Additionally any upward trend in the 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
- Firstly the days ratio should be the same as your Terms of Trade with customers.
- Secondly a cash business should have a much lower debtor days figure than a non-cash business.
- Finally typical ranges for the days ratio for a non-cash business would be 30-60 days.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.