Debtor Days Formula

Debtor Days Formula (Table of Contents)

Debtor Days Formula
Examples of Debtor Days Formula (With Excel Template)
Debtor Days Formula Calculator

Every company needs sales to run its business. Customers who are buying the products from the company can either pay upfront or can pay after some time. If they choose to pay in the future, they will become the debtors and this amount will become account receivable for the company. So debtor days are basically the average number of days required by the business to receive payment from its customers. It measures how quickly a business can collect cash from debtors. If the debtor days are very large, it means that the company is not getting it payment timely and their money is stuck in account receivables. So they have to put additional money from their pocket to run the business. Similarly, if debtor days are smaller in number, it means that money is being collected on time and it can be put in use for other operations.

There is a number of factors which derives the debtor days. For example, what is the industry norm, a discount is given on early payments, billing errors etc? We will discuss this in detail later in the article.

A formula for debtor days is given by:

Debtor Days = (Trade Receivables / Credit Sales) * 365 Days

Sometimes it is also called Days sales Outstanding and can be given by

Debtor Days = (Receivables / Sales) * 365 Days

This is basically a mix ratio i.e. it is making use of both income statement and balance sheet. Receivables can be found in the balance sheet under current assets section. Sales are the top line of the income statement.

Examples of Debtor Days Formula (With Excel Template)

Let’s take an example to calculate the Debtor Days in a better manner.

You can download this Debtor Days Template here – Debtor Days Template

Debtor Days Formula – Example #1

Let Say Company X has the following data point for the year 2018.

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Debtor Days is calculated using the formula given below

Debtor Days = (Receivables / Sales) * 365 Days

Debtor Days = (3,000,000 / 20,000,000) * 365
Debtor Days = 54.75 days

This number you see alone has no significance as such. We need to compare this number with the other companies in the same industry and see where we stand. If the number is more than what is in the industry, the company needs to work on improving the debtor days so that they have early cash to run its operations.

Debtor Days Formula – Example #2

Let see an example from industry to understand debtor days. I am taking Amazon as an example.

Below is the snapshot of Amazon’s Income statement and Balance sheet.

Income Statement:

Source Link: https://in.finance.yahoo.com/quote/AMZN/financials?p=AMZN

Balance Sheet:

Source Link: https://in.finance.yahoo.com/quote/AMZN/balance-sheet?p=AMZN&.tsrc=fin-srch-v1

Using the above data points, we have the following information:

Debtor Days is calculated using the formula given below

Debtor Days = (Receivables / Sales) * 365 Days

Debtor Days for 2018

Debtor Days = (16,677,000 / 232,887,000) * 365
Debtor Days= 26.14 days

Debtor Days for 2017

Debtor Days = (11,835,000 / 177,866,000) * 365
Debtor Days = 24.29 days

Explanation

As discussed above, debtor days determine how quickly a business can collect cash from its debtors. The longer the customers are taking to pay back, the higher will be the debtor days and vice versa. If we see that number alone, we will not be able to make out anything out of that. So, there are multiple parameters on which the size of the debtor days depends:

First thing is that we need to take into consideration the debtor days for that particular industry and then compare that with our number. What happens is that in some industries, paying late has become a tradition in the customers, so there is no point in expecting early payments from them.
Secondly, what incentives customers are getting if they are paying early. Companies offer early payment discount and other benefits to the customer for advance payments. Companies should determine the amount of discount by taking into consideration the opportunity value.

It is also important to compare debtor days with what contractual payments term you have with the client. For example, if you have 30 days payment term and debtor days are 45, so the client is taking 15 excess days from the committed terms.

If the business has high debtor days, it implies that the business will have money stuck with the customers and have less in hand money to use. This could result in a decline in the growth of the company because of a lack of available resources for investments. Businesses also have some obligation which they need to cater and if fewer funds are available, they have no choice but to take a loan to fulfill those obligations.

Relevance and Uses of Debtor Days Formula

For any business, cash flows are a vital part of their operations and efficient cash flow management will help them to grow. Debtor days are one of the major ratios which businesses need to keep a close eye and have to monitor regularly. This ratio helps them to understand how much time the customers are taking to pay them back and if there is any need to take effective measures. The more cash in hand business will have, the more the chances of them to invest in a profitable project and grow. If the money is stuck, they will have to leave that opportunity which will hamper the growth.

Another factor which we have not talked in the size of the customer to the business. If the customer is a big client from last so many years, business will have very less say because they might lose the customer. So they have to be very careful in that aspect also. On average, 30-60 debtor days are an average and decent number which a business can try to maintain.