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"Debtor days" is a term used to describe the average amount of time that it takes for customers of a given company to settle their accounts with the provider. Many companies utilize a formula that calls for dividing the number of debtors by the sales produced, then multiplying that figure by 365. A slightly different approach involves dividing the number of debtors by the sales, then multiplying the result by 100. For the most part, calculating debtor days is helpful in terms of evaluating shifts in remittance patterns with a single company’s client base, but is typically not used as a means of assessing the status of several companies operating within the same industry.
The idea behind calculating debtor days is to identify trends within the payment habits of a company’s customers. When the amount of days determined by the formula decreases from one period to the next, this is an indication that customers are paying faster, a situation that most companies would find favorable. At the same time, if the results of the calculation indicate that on average customers are taking longer to retire their debt to the company, this could be an indication of upcoming issues within the client base. At that point, company officers and managers would want to examine the payment trends of individual clients to determine which ones are actually taking longer to pay and how much of the sales income those slower pays account for in the overall revenue stream.
From this perspective, tracking debtor days from one period to the next can benefit the company in several ways. This includes identifying emerging trends that will eventually have a noticeable impact on cash flow and the company’s ability to settle debt with its vendors and suppliers. While some small amount of variance is likely to occur from one period to the next, consistent increases in debtor days over several periods usually does indicate that something is happening with one or more customers and that the business will need to identify ways to minimize that impact before it begins to adversely affect the operation.
It is important to note that not all businesses have a need to calculate debtor days. Any business that operates on a strictly cash basis, meaning payment is rendered at the time of purchase, does not have to be concerned about defaults on payments from customers. Companies that do allow customers to receive goods or services now and pay for them at a later date take on an additional element of risk, as there is always the possibility that one or more customers will default on those debt obligations. For any company that extends credit for any period of time, calculating debtor days is important for spotting unfavorable trends early on and minimizing the chances of incurring defaults on a significant amount of the accounts receivable over a period of time.
What would one use to assess the status of several companies operating within the same industry.