Debtor days is the average number of days it takes your customers to pay you. It is one number, it sits quietly in your accounting software, and for most owner-managed engineering, technical and SaaS businesses it is the clearest single measure of how much cash is stuck with customers. This guide shows how to calculate debtor days properly (including a VAT mistake that adds about ten days to the answer), how to read the figure, and what to do this week to bring it down.

What debtor days tells you

Debtor days (also called debtor collection days, or DSO, days sales outstanding) answers one question: on average, how many days of sales are sitting unpaid in your customers’ hands right now?

If your standard terms are 30 days and your debtor days is 30, customers pay on time on average. If it is 50, they are paying around 20 days late on average, or your invoices go out late, or both. Each extra day is roughly one day of sales held by someone else. We covered what that adds up to in how much cash is tied up by customers paying late. This article is about getting the measurement right and using it.

How to calculate debtor days

You need two figures from Xero, QuickBooks or Sage: trade debtors (what customers owe you today, from the aged receivables or aged debtors report) and sales for the last 12 months.

The simple method

Debtor days = trade debtors ÷ annual sales × 365

It is quick and fine for tracking a trend, but it has two weaknesses: the VAT mismatch and seasonality.

The VAT mistake

Your trade debtors figure includes VAT, because customers owe you the full invoice total. Your sales figure in the profit and loss excludes VAT. Divide one by the other and the answer is too high. For a business charging the standard VAT rate of 20% on all its sales, either add VAT to the sales figure (sales × 1.2) or strip it out of debtors before you divide. If some of your sales are zero-rated or outside the scope of VAT (exports of services, for example), adjust for the mix, and ask your accountant if you are unsure which of your sales carry VAT.

The count-back method

If your sales vary month to month, the annual average misleads. A busy September makes debtors jump, and the simple method reads that as customers paying more slowly. The count-back method fixes this. Start with today’s debtors and subtract each month’s invoiced sales (including VAT), most recent month first, counting the days, until the debtors are used up.

A worked example

Example Fire Engineering Ltd is a made-up fire engineering consultancy. All its sales carry 20% VAT.

• Sales for the last 12 months: £3.6m excluding VAT, so £4.32m including VAT.
• Trade debtors at 31 October: £600,000 (including VAT).
• Invoiced in October: £400,000. September: £360,000 (both including VAT).
• Standard terms: 30 days from invoice.

Simple method, VAT mismatched: £600,000 ÷ £3,600,000 × 365 = 60.8 days.

Simple method, VAT matched: £600,000 ÷ £4,320,000 × 365 = 50.7 days. The VAT mistake alone added ten days.

Count-back: October’s £400,000 accounts for 31 days and leaves £200,000. That is £200,000 ÷ £360,000 = 0.56 of September, or about 16.7 of its 30 days. Total: 31 + 16.7 = about 48 days.

Against 30-day terms, customers are taking about 18 days longer than agreed. At £4.32m a year including VAT, each day of debtors is worth about £11,836 (£4,320,000 ÷ 365). Bringing debtor days down from 48 to 40 would bring in about £94,700 of cash (8 × £11,836), once, and keep it in the business from then on. Nothing about the work or the prices changes.

How to read the number

• Compare it with your own terms, not someone else’s benchmark. A figure that is fine for a firm on 60-day terms is poor for one on 30. If big customers are on longer terms, work out a weighted average of your actual terms first.
• Watch the trend. Calculate it on the same day each month, using the same method. One reading tells you little. Six readings tell you whether things are getting better or worse.
• Split it by customer. The total hides the detail. Take the five customers who owe you most and work out debtor days for each, using their own debtors and their own 12-month sales. It is common for one or two to account for most of the lateness.
• Remember what it leaves out. Debtor days only counts invoices already sent. Work finished but not yet invoiced sits outside it, so a firm that invoices slowly can have a respectable debtor days figure and still be short of cash. We covered this in cash flow problems in a growing engineering consultancy.
• Check for disputed and stale items. An old invoice that is disputed, or that you expect to credit, inflates the figure. Sort it out rather than leave it sitting in the ledger.

How to bring debtor days down

Debtor days is made up of two things you control: when the payment clock starts (the invoice date and quality) and what happens once it is running (terms and chasing). Work on both.

Before the invoice goes out

1. Invoice on the day the work is finished. Every day of delay is added straight to the time you wait. Our guide to same-day invoicing in Xero shows the settings.
2. Make every invoice payable as sent: the customer’s PO number, the right approver, wording that matches the quote. An invoice your customer cannot process gets parked without anyone telling you.
3. Put clear terms on the quote, before the customer says yes. “Payment due 30 days from the invoice date” is clearer than “30 days” alone.
4. Bill longer jobs in stages, with a deposit at order. See stage payments for engineering projects.

After the invoice goes out

5. Run a fixed chase routine, starting before the due date, so it happens whether or not anyone remembers. Most of it can be automated in Xero and QuickBooks.
6. Phone the late payers who matter. Software sends emails. A short call to the person who placed the order usually finds the real reason an invoice is stuck.
7. Deal with disputes the day they appear. Agree to pay the undisputed lines now and resolve the rest separately.
8. Review the worst three customers each month. For a customer who is always late, the answer may be stage payments, a deposit, or a pricing conversation, not more emails.

What to do this week

1. Run your aged debtors report and your sales for the last 12 months.
2. Calculate debtor days with VAT matched, then with the count-back method.
3. Subtract your standard terms. Multiply the gap by your daily sales including VAT. That is the cash you are waiting for beyond what you agreed.
4. Work out debtor days for your five largest debtors.
5. Pick one fix from each list above and give it an owner and a start date.
6. Put a monthly reminder in the diary to recalculate on the same day each month.

Our free Late Payment Kit includes chase-email templates and a simple cash calculator you can use alongside this.

Put a £ figure on it

Our free leak calculator takes a few numbers and estimates how much cash your late payers and slow invoicing are holding. It takes about two minutes. If you’d like a second pair of eyes on the figure and which fix to start with, book a free 30-minute call, or see how our reviews work.