What is the Average Debtor Days Ratio?
Average debtor days is a ratio that measures how quickly a business collects cash from its customers.
Why is it important?
The Average Debtor Days Ratio demonstrates how long the average invoices is converted to cash.
Lack of cash flow can stifle business growth, make it difficult to pay suppliers, and result in extra interest payments on overdraft balances. Essentially slow cash turnover will cost your business money. It is important to review as it is good to keep in check/focus and also continually work on improving. Maybe this can be done by improving your business collections policy. Some clients may require a follow up call to ensure the invoice has been received and a further call to ensure payment. The longer the debt is unpaid the higher the chance the debt may become bad and non-recoverable.
How to calculate Average Debtor Days
Average Debtor Days are calculated by dividing the average number of daily sales by the average number of debtor days.
Debtor Turnover Ratio = Net Credit Sales / Average Trade Debtors
Net Credit Sales (Sales to customers on accounts less credit adjustments) = $160,000
Average Trade Debtors (Debtors at the start of the year (say $50,000) plus debtors at the end of the year (say $15,000) divided by 2)
Average Trade Debtors = $65,000/2
Average Trade Debtors = $32,500
Debtors Turnover Ratio = $160,000/$32,500
Debtors Turnover Ratio = 4.9230 times per year
Average Debtor Days = 365 Days / 4.9230
Average Debtor Days = 74.14 days