Debtor days = debtors ÷ sales x 365
It is important to compare. Compare this year to last year, or this month to last month (or to the same month last year). It’s not only the absolute figure that gives you a clue as to how your business is doing, the comparison is also important.
For example if your debtor days calculation = 30 days this means that customers are taking an average time of one month to pay you. For many businesses that’s probably a reasonable number of days, however, if your business is one that relies on cash sales then 30 days would not be a good sign. Also, if your business’ debtor days has changed from 10 days last year to 30 days this year, you should be asking why. Is it because you became desperate and you’ve been selling to people who will never pay you? Is it because you became distracted and you’ve failed to devote time to following up overdue debtors (perhaps sales increased and you thought that meant your business was doing really well, forgetting that sales don’t really matter unless you get paid for them). Or, has your business made a well thought out strategic decision to transition from cash to credit sales in order to capture worthwhile business, and this decision has been backed up with pre arranged additional funding from shareholders or the bank.
Every dollar tied up in debtors is a dollar you are unable to use in expanding your business, or it may be a dollar that has to be covered by increased borrowing. Knowing your ratios is an essential business tool.