How to reduce debtor days and the cost of waiting for cash

Key takeaways

To reduce debtor days, invoice sooner, invoice accurately and chase on a schedule. Debtor days measure how long customers take to pay. In our example, bringing them from 49 to 35 releases about £33,700 of cash. Most of the delay is created inside the business, by late and incorrect invoices, before the customer has done anything.

• Debtor days: trade debtors divided by annual credit sales, times 365.
• 49 days cut to 35 releases about £33,700 in our example.
• Invoice on the day the work is done, not at month end.
• A chasing schedule that runs every week beats occasional effort.

What are debtor days?

Debtor days, also called days sales outstanding, measure the average number of days it takes a business to collect payment after a sale on credit. A lower figure means cash arrives sooner. It is one of the clearest indicators of how well the invoicing and collection process works.

• How BPO can help businesses reduce operational costs
• Outsourced invoicing and credit control

How do you calculate debtor days?

Divide the amount customers owe you by your annual credit sales and multiply by 365. In an illustrative firm with £120,000 owed and £900,000 of annual credit sales, debtor days are about 49. If the payment terms are 30 days, customers are taking 19 days longer than agreed.

• Trade debtors: £120,000.
• Annual credit sales: £900,000.
• Debtor days: 120,000 divided by 900,000, times 365, about 49.

• Cost baseline: measure today's cost before you change it

What does slow payment cost?

Slow payment costs the financing of the cash you are waiting for, the time spent chasing and the risk that old debts are never paid. Reducing debtor days from 49 to 35 in the example cuts the amount owed from £120,000 to about £86,300, releasing roughly £33,700.

If that cash would otherwise be borrowed at an illustrative 8% a year, the saving is about £2,700 annually, before counting the hours of chasing. For a growing firm, the released cash is often worth more than the interest: it funds the next job.

• Outsourcing and cash flow: fixed costs to variable
• Cost of delay: what waiting costs a small business

How do you reduce debtor days?

Reduce debtor days by removing the delays you control before pressing customers on the ones they control. In most small businesses the invoice goes out days or weeks after the work, and a share are queried because something is wrong. Those two causes come first.

• 1. Invoice on completion, not in a month-end batch.
• 2. Get invoices right: order number, contact, correct amounts.
• 3. State terms and due date clearly on every invoice.
• 4. Offer easy ways to pay, with bank details and a payment link.
• 5. Send a reminder before the due date and on it.
• 6. Chase overdue invoices weekly, by phone after the second reminder.

• Right first time rate: the quality number that cuts cost
• Process standardisation: one best way, lower cost per task

What does UK law say about late payment?

For business-to-business sales, if no payment date is agreed, the law treats payment as late 30 days after the customer receives the invoice or the goods or service, whichever is later. You can charge statutory interest of 8% above the Bank of England base rate on late commercial payments, plus a fixed sum for recovery costs.

Few small firms claim it, because they value the relationship. Stating the right on invoices still helps payment arrive on time.

• BPO contract terms to check before signing

When should you hand over the chasing?

Hand over the chasing when it is not being done consistently. Chasing works through regularity, and it is the first task dropped in a busy week. A managed team that sends reminders and makes calls on a fixed schedule, in your name and tone, usually shortens debtor days simply by never skipping a week.

Keep decisions about disputes, payment plans and legal action in-house.

• How to reduce back-office costs in a UK small business
• When not to outsource

What does this look like in practice?

A pattern we see in trades and professional firms: invoices are raised in one sitting at the end of the month, because that is when the owner has time. Work finished on the 3rd is billed on the 30th. Nearly a month of delay is added before the customer's terms even begin. Invoicing on completion fixes it without a single awkward call.

• See client work
• BPO Solutions for UK businesses

Debtor days checklist

Review these monthly.

• Calculate debtor days and compare with your terms.
• Measure days from job completion to invoice.
• Count invoices queried or reissued.
• Confirm every invoice shows terms and due date.
• Run reminders on a fixed weekly schedule.
• List debts over 60 days with an owner for each.

• Month-end close: how to finish faster with less effort
• Cost reduction KPIs: the numbers that prove savings are real

Next step

Send us your debtor total, annual sales and payment terms. We will calculate your debtor days, show where the delay is being created and outline what a regular chasing routine would look like.