Your profit and loss account says you made money. Your bank account does not feel like it. It is one of the most common frustrations in small business, and one of the first places I would look is debtor days.
Debtor days tells you, on average, how long your customers are taking to pay you. Not what your payment terms say. What is actually happening.
How to calculate debtor days
The standard calculation is:
Trade debtors ÷ annual credit sales × 365
Trade debtors is the total owed to you by customers. Credit sales are sales made on account, where the customer pays later — not cash or card sales settled immediately.
A worked example
Take a business with annual credit sales of £365,000. That is roughly £1,000 of sales a day, which makes the arithmetic easy to follow.
Trade debtors stand at £45,000.
£45,000 ÷ £365,000 × 365 = 45 days
So on average, around 45 days’ worth of sales is tied up in money owed by customers.
If your payment terms are 30 days, that 15-day gap is worth investigating. Because while you are waiting:
- Staff still need paying
- Rent still goes out
- Suppliers still expect payment
- VAT may still be due on invoices you have raised but not been paid for
- And the business still needs cash to keep operating
That VAT point catches people out. If you are on standard VAT accounting, the VAT becomes payable based on the invoice date, not the date your customer settles. You can be funding HMRC on money you have not received.
Why it matters in cash terms
Here is the part worth sitting with.
If debtor days could be reduced from 45 days to 30 days, that would release roughly £15,000 of cash back into the business, assuming sales stay at the same level.
At 45 days: £45,000 tied up in receivables
At 30 days: £30,000 tied up in receivables
Cash released: £15,000
Not additional profit. Not a new loan. Not an overdraft with interest attached. It is cash that already belongs to the business, currently sitting in someone else’s bank account.
For most small businesses, that is a more realistic source of funding than anything a lender would offer, and considerably cheaper.
Before you blame your customers
It is tempting to treat slow payment as something customers do to you. Often part of the problem is closer to home.
Consider a business that invoices monthly in arrears on 30-day terms. Work done on the 1st of the month is not invoiced until the 31st, and is not due until the 30th of the following month.
That is 60 days from doing the work to being owed the money, and the customer has not been late once.
Invoice promptly and cash can arrive sooner without changing your payment terms or having an awkward conversation with anyone. For some businesses, moving from monthly invoicing to invoicing on completion is the single biggest cash flow improvement available to them.
Debtor days is about four things, not one
Chasing invoices is only part of it. The figure is really telling you about:
- How quickly invoices are raised. The clock does not start until you invoice.
- Whether customers stick to agreed terms. Terms only mean something if they are enforced.
- How effectively overdue balances are followed up. A consistent, polite process beats an occasional difficult phone call.
- Whether particular customers consistently pay late.
That last point deserves attention on its own.
The average can hide the problem
One customer paying in 90 days can easily be masked by several others paying in 20. The average looks acceptable while a specific relationship is quietly funding itself out of your working capital.
So alongside the overall figure, it is worth running an aged debtors report and looking at the actual list. You are looking for:
- Balances that have been outstanding more than 60 or 90 days
- Customers who are consistently late rather than occasionally late
- Any single customer representing a large share of what you are owed
That last one is a risk question as much as a cash question. If one customer owes you a significant proportion of your receivables and they run into difficulty, the problem is no longer about timing.
Two refinements worth knowing
For businesses where sales fluctuate significantly through the year, using average trade debtors rather than just the year-end balance gives a more representative picture. A year-end figure taken at your quietest point can flatter the result considerably.
It is also worth being consistent about whether you calculate on figures including or excluding VAT. Trade debtors usually include VAT while sales figures usually exclude it, which can distort the result. The comparison that matters most is your own figure over time, calculated the same way each time.
What to do with the number
Work out your debtor days, then compare the result with your normal payment terms. The wider the gap, the more cash is sitting outside the business rather than in it.
Then track it. A single figure tells you where you are. A figure reviewed monthly tells you whether your invoicing and credit control are improving or slipping, and gives you the chance to act before it becomes a cash flow problem.
This connects directly to how long your business could keep going if income stopped. Money tied up in receivables is the most common reason a business with a healthy order book still finds itself short of cash.
Regular management accounts make this visible as a matter of routine, rather than something discovered when the year-end accounts are prepared and the position is already months old.
Compliance is important. Understanding your numbers is where the real value lies.
If you would like help working out your debtor days, reviewing your aged debtors, or putting monthly reporting in place, book a consultation and we can look at it together.
