Debtor Days Ratio

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. It is sometimes referred to as days’ sales in accounts receivable.

What is the Formula for Debtor Days?

Debtor Days = Debtors / Average daily sales = Debtors / (Sales / 365)
  • Debtors is given in the Balance Sheet and is normally under the heading trade debtors.
  • Sales is found in the Profit and Loss Account.

How is Debtor Days Calculated in Practice?

Example 1

As 365 days (1 year) is used in the formula you must use the annual sales figure for sales.

Annual sales 200,000 and year end debtors 20,000 then
Debtors Days Ratio = 20,000 / (200,000 / 365) = 36.5 days
It takes the business on average 36.5 days to collect debts 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.

If using monthly (30 days) management accounts
Monthly sales 18,000 and month end debtors 19,000 then
Debtors Days Ratio = 19,000 / (18,000 / 30) = 31.7 days

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.

Any upward trend in the Debtor 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

  • The Debtor Days should be the same as your Terms of Trade with customers.
  • A cash business should have a much lower Debtor Days figure than a non-cash business.
  • Typical ranges for Debtor Days for a non-cash business would be 30-60 days.
Debtor Days Ratio November 6th, 2016Team

You May Also Like

Related pages

prime and conversion costshow do i calculate payback periodaccounting balance sheet template excelretained profits definitioninterest accrualsreturn on capital employed calculationconsignment sales revenue recognitionamortisation costhow to calculate the markup percentagereceived cash on account journal entryfob shipping point fob destinationpresent value of annuity formula in exceladvantages of subsidiary bookspv annuity tablesstandard costing variance analysishow to determine manufacturing overheadcalculation of depreciation straight line methodin a bank reconciliation a nsf check isdouble entry bookkeeping explainedbalance sheet reconciliation examplehow to calculate overhead variancepercentage of completion revenue recognition journal entriesdiscounting rate formulajournal entries under perpetual inventory systemcash voucher sample formatprovision for income tax journal entrygaap chart of accounts numberingcallable preferred sharesgrowth perpetuityretained profits definitionbad debt provision vatpresent value chart $1perpetuity calculation formulafixed asset turnover formulaturnover ratio calculatoraging of accounts receivable method formulaproveit data entry testwarranty expense journal entryfactoring accounts receivablesdays in accounts receivable formuladiscounting a bill of exchangepresent value of an annuity formulahow to calculate account receivable turnoverinternally generated intangible assets examplesbookkeeping website templatesprepaid asset journal entrypayback accountingformat of general ledgertill reconciliation sheetbookkeeping worksheetsimprest meansreversing journal entries exampleplant assets examplesrate of depreciation calculatorbrand intangible assetaccrued vacation accountingaccounts payable debitdouble decliningjournal entries basicsexample of a cashbookstraight line depreciation graphsmall business accounting excel templateoutstanding checks definitionfixed overhead budget varianceaccounting concept and principlesoperating expenses equationweighted average contribution marginoffice supplies accounting definitionhow to calculate days receivable ratiosuspense in accountingstock holder equitygeneral ledger excelnetbook valueestablishing a petty cash fundpresent annuity tableaccounts payable ratiosdefine deferred taxexample of annuity due problemsfreight prepaid collectpayback calculator excelestimated manufacturing overhead costhow to record collection of accounts receivablereturn on capital employed calculator