A business can be profitable on paper and still run out of money. It is one of the most common and least understood ways small businesses get into trouble, and it almost always comes back to one number: how long customers actually take to pay.
That number is called debtor days, and most business owners have never calculated it.
What debtor days actually measures
Debtor days tells you, on average, how many days it takes your customers to pay an invoice after you raise it. It does not matter what your payment terms say. It matters what actually happens.
Example. If your business has £40,000 currently owed by customers and your annual sales are £400,000, your debtor days are (40,000 ÷ 400,000) × 365 = 36.5 days. If your stated payment terms are 30 days, that gap of six and a half days tells you customers are paying slightly later than agreed, on average.
Why this number matters more than most owners realise
Wages still need paying on the last working day of the month. Rent still needs paying on the quarter day. Suppliers still expect payment on their terms. None of that waits for your customers to settle their invoices.
A business that is profitable on paper can run out of cash entirely if the gap between when costs go out and when revenue comes in grows too wide. Debtor days is the clearest single measure of that gap on the income side.
The businesses that get caught out by this are often the ones doing well. Growing revenue. Winning bigger customers. Bigger customers often negotiate longer payment terms, or simply pay late because they can. Growth without managing debtor days is one of the fastest routes to a cash crisis in an otherwise healthy business.
What good looks like
As a rule of thumb, your debtor days figure should sit close to your stated payment terms. If your terms are 30 days and your debtor days are consistently around 30 to 35, that is healthy. If they are sitting at 50, 60 or higher, a significant proportion of your customer base is paying considerably later than agreed, and it is costing you in ways that do not show up directly on the P&L.
What drives debtor days up
- Invoices that are not raised promptly when work is completed
- Payment terms that are unclear, inconsistent or not stated on the invoice itself
- No follow-up process when an invoice passes its due date
- Large or important customers who are allowed to set their own informal terms
- No one in the business with clear ownership of chasing payment
- Disputes or queries on invoices that are never resolved quickly
How to bring it down
Invoice immediately. The clock should start the day the work is delivered, not whenever it is convenient to raise the paperwork. Delayed invoicing is one of the simplest and most common ways debtor days creep upward.
State terms clearly, every time. Payment terms should appear on every invoice, in plain language, with the actual due date calculated and visible. Do not make the customer do the arithmetic.
Build a simple follow-up process. A polite reminder a few days before the due date. A firmer follow-up the day after it passes. A clear escalation point if an invoice goes significantly overdue. Most small businesses have no process at all, which means late payment becomes the default rather than the exception.
Review terms with your largest customers specifically. The customers with the most negotiating power are often the ones with the worst payment behaviour. It is worth knowing, customer by customer, who is genuinely driving your debtor days up.
Consider whether discounts for early payment make commercial sense. A small discount for payment within 14 days, properly costed against your margin, can be a cheaper way to improve cashflow than borrowing to cover the gap.
Frequently asked questions
What is a good debtor days figure? It depends on your stated payment terms, but as a rule of thumb your debtor days figure should sit close to your agreed terms. If your terms are 30 days and your debtor days are 55, a significant proportion of customers are paying late.
How do I calculate debtor days? Trade debtors divided by annual sales, multiplied by 365. This gives you the average number of days customers take to pay an invoice.
Can a profitable business fail because of debtor days? Yes. A business can be profitable on paper and still run out of cash if customers are slow to pay, because wages, rent and suppliers still need paying on time regardless of when customers settle their invoices.
Worried about your cash position?
Moor & Co helps small businesses across Staffordshire and South Cheshire build cashflow visibility and credit control processes that bring debtor days down and keep them down.
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