Debtor Days in One Line
Debtor days, also called the debtor collection period or days sales outstanding (DSO), is the average number of days your customers take to pay you.
Debtor days = trade debtors ÷ credit sales × 365
If a business is owed £100,000 at the year end and makes £730,000 of credit sales a year, its debtor days are 50. On average, it waits 50 days between raising an invoice and seeing the money.
That is the formula you will find on every other page. It is fine for a quick look at a set of accounts. For running a business, it is often wrong by two or three weeks, and the rest of this guide is about why and what to do instead.
If you want the background on the balance itself, our guide to trade receivables covers what counts as a trade debtor and how it sits on the balance sheet.
What Goes Into the Formula
Each part of the formula has a choice hidden inside it.
Trade debtors. The figure owed by customers for goods or services you have invoiced. Leave out prepayments, director's loans, VAT refunds due and other debtors. They are not customers and they are not collected through your credit control.
Credit sales. Sales made on terms. If part of your business is paid at the till or by card on the day, strip that out. Including it makes debtor days look better than your credit control really is. A café with a catering arm should measure the catering invoices only.
The period. 365 for a year. For a quarter use the days in that quarter, and for a month the days in that month, with the sales for that same period. Mixing a monthly debtor balance with annual sales is one of the commonest errors we see in board packs.
Opening, closing or average debtors. Textbooks often use the average of opening and closing debtors. That smooths the number but describes a business that existed six months ago. For management purposes we prefer the closing balance, measured with the count-back method below.
The VAT Mistake That Adds Weeks
If you are VAT registered, your debtors include VAT. Your turnover in the profit and loss account does not. Divide one by the other and you overstate debtor days by roughly the VAT rate, which at 20% is about a sixth.
The fix is simple. Either gross up sales by the VAT rate, or strip the VAT out of debtors. Do not mix the two. If some of your sales are zero rated or exempt, gross up only the standard rated part. We cover the cash forecasting side of this in our guide to cash flow forecasting.
A Worked Example: Three Answers, One Balance Sheet
Brightwell Cleaning Ltd is a commercial cleaning company in Southgate. It invoices office managers, schools and managing agents monthly in arrears on 30 day terms. Its year end is 31 March 2027.
| Figure | Amount |
|---|---|
| Turnover for the year (net of VAT) | £1,200,000 |
| Turnover including 20% VAT | £1,440,000 |
| Trade debtors at 31 March 2027 (including VAT) | £236,000 |
Method 1, the textbook formula. £236,000 ÷ £1,200,000 × 365 = 71.8 days.
Method 2, VAT corrected. £236,000 ÷ £1,440,000 × 365 = 59.8 days.
That is twelve days gone just by comparing like with like. But there is a second problem. Brightwell won two big office contracts in the autumn and its sales have been climbing all year. Its last three months were much busier than its average month.
| Month | Sales invoiced (including VAT) |
|---|---|
| January 2027 | £114,000 |
| February 2027 | £126,000 |
| March 2027 | £150,000 |
| Average month across the year | £120,000 |
The annual formula assumes the £236,000 owed at the year end was built up from an average month of £120,000. It was not. It came from the most recent months, which were much bigger. So the annual formula makes customers look slower than they are.
Method 3, the count-back method. Start with the debtor balance and work backwards through the most recent months of sales until the balance is used up.
- March sales were £150,000, all of it still outstanding. That covers 31 days. Debtors left to explain: £236,000 minus £150,000 = £86,000.
- February sales were £126,000. Only £86,000 of the balance remains, which is 68% of February. 68% of 28 days is 19.1 days.
- Debtors are used up. Debtor days = 31 + 19.1 = 50.1 days.
| Method | Debtor days |
|---|---|
| Textbook formula, net sales | 71.8 |
| VAT corrected, annual sales | 59.8 |
| VAT corrected, last three months (£236,000 ÷ £390,000 × 90) | 54.5 |
| Count-back, VAT corrected | 50.1 |
Same company, same day, same balance sheet. The answer runs from 50 to 72 days depending on the method. If Brightwell's director had read 72 days in the accounts and hired a credit controller in a panic, it would have been solving a problem that was a third smaller than it looked.
The count-back method works the other way too. In a business where sales are falling, the annual formula flatters debtor days, and count-back shows the real slippage sooner. We think it is the only version worth putting in monthly management accounts, and it takes a few minutes in a spreadsheet once your sales ledger is up to date.
Days Beyond Terms: The Number That Matters
A debtor days figure on its own means little. 50 days is excellent for a business on 60 day terms and poor for one on 14 day terms. What tells you how well credit control is working is the gap between the two.
Days beyond terms = debtor days − your standard payment terms
Brightwell's terms are 30 days, so its days beyond terms are 50.1 − 30 = 20 days. Credit reference agencies use a similar measure when they score how a business pays its own suppliers, so it is a familiar language to lenders.
Our rough guide for UK small businesses:
- Under 10 days beyond terms. Good. Customers mostly pay on time, with a few stragglers.
- 10 to 20 days. Normal for many B2B sectors but worth a look. Usually a process problem, not a customer problem.
- Over 20 days. You are lending your customers money for free, and it will be showing up in your overdraft.
Sector matters. Construction subcontractors routinely wait well beyond their terms, as do suppliers to large retailers and the public sector. Our construction clients often see 60 days or more on 30 day terms. That does not make it acceptable, but it does mean comparing yourself with a published "average" for all UK businesses is not much use.
What Each Day Is Worth in Cash
This is the calculation that gets owners' attention.
Cash tied up per debtor day = annual credit sales (including VAT) ÷ 365
For Brightwell, that is £1,440,000 ÷ 365 = £3,945 per day.
If Brightwell got its customers back to its 30 day terms, cutting 20 days, it would release about £78,900 of cash. That is money it currently funds out of its overdraft or its own reserves. At an 8% overdraft rate, the interest alone is around £6,300 a year, before you count the time spent chasing.
No change in sales, prices or costs. Just getting paid on the terms already printed on the invoice. Of all the working capital levers, debtor days is usually the one an owner can move fastest, because it does not depend on suppliers agreeing to anything.
Use the Aged Debtors Report Alongside It
Debtor days is an average, and averages hide things. One slow customer can drag the whole figure up while everyone else pays on time. Your aged debtors report, which any accounting software will produce in a few clicks, breaks the balance down by how old each invoice is.
Brightwell's aged debtors at 31 March looked like this:
| Age | Amount | Share |
|---|---|---|
| Not yet due (March invoices) | £118,000 | 50% |
| 1 to 30 days overdue | £64,000 | 27% |
| 31 to 60 days overdue | £30,000 | 13% |
| Over 60 days overdue | £24,000 | 10% |
| Total | £236,000 | 100% |
On closer look, one managing agent owed £38,000 of the overdue balance, including £20,000 of the £24,000 over 60 days. Brightwell's problem was not 80 customers paying a bit late. It was one customer paying very late and a handful of others drifting. That calls for a phone call to one accounts payable department and a firmer reminder process for the rest, not a new policy for everyone.
Our view is simple. Track debtor days to see the trend. Use the aged debtors report to decide who to call. Anything over 90 days needs a decision about whether it is a bad debt, which also matters for VAT, since bad debt relief becomes available once an invoice is six months overdue and written off in your books.
Debtor Days and Creditor Days Together
Debtor days is one half of a pair. Creditor days measures how long you take to pay your suppliers. If customers pay you in 50 days and you pay suppliers in 30, you fund a 20 day gap from your own cash. If you stock goods as well, add stock days and you get the cash conversion cycle, which is the full length of time your cash is tied up in the trading cycle.
For a service business like Brightwell, wages are the biggest cost and staff are paid monthly with no credit at all. That is why cleaning, security, recruitment and staffing businesses feel late payment more than most. Their creditor days on the biggest cost line are effectively zero.
The Law on Late Payment
Under the Late Payment of Commercial Debts (Interest) Act 1998, a business that pays another business late can be charged statutory interest and a fixed compensation sum, unless your contract sets out a different, substantial remedy.
- Statutory interest is 8 percentage points above the Bank of England base rate, charged daily from the day after the payment was due.
- Fixed compensation is £40 for debts under £1,000, £70 for £1,000 to £9,999.99, and £100 for £10,000 or more.
As an illustration, if base rate were 4%, a £9,600 invoice paid 40 days late would attract £9,600 × 12% × 40 ÷ 365 = £126.25 of interest plus £70 of compensation.
Few small businesses actually claim it, for the obvious reason that they want to keep the customer. Our view is that it is still worth stating clearly in your terms and on your invoices. Customers who run a payment queue tend to pay the suppliers who look like they will charge interest first. You do not have to claim it every time to benefit from the fact you could.
Two other tools are worth knowing about:
- Payment practices reports. Large UK companies must publish how quickly they pay their suppliers twice a year. Before you give a big customer generous terms, look them up on the government's check payment practices service. If they average 70 days with their other suppliers, they will probably average 70 days with you.
- The Office of the Small Business Commissioner can look into complaints about large businesses paying small suppliers late, for free.
How to Bring Debtor Days Down
Most of the improvement comes from dull, consistent process rather than clever tactics. In rough order of impact, from what we see across our clients:
- Invoice the day the work is done. Every day an invoice sits in a drafts folder is a day added to debtor days. Brightwell moved from invoicing in the second week of the following month to the first working day and took about eight days off its figure.
- Get the invoice right first time. A missing purchase order number is the most common reason a large customer's accounts team parks an invoice. A purchase order reference, the right contact and the right entity name save weeks. Wrong invoices also lead to credit notes and a restart of the clock.
- Agree terms before the work, in writing. Including who approves invoices on the customer's side.
- Automate polite reminders, a few days before the due date, on the due date, and a week after. Xero, QuickBooks and most other packages do this for free.
- Make paying easy. A payment link or direct debit on recurring work removes the excuse.
- Pick up the phone at 15 days overdue. Email reminders get ignored. A call to the person who actually releases payments rarely does.
- Take deposits or stage payments on larger jobs.
We would put invoice finance and factoring after all of that, not before. They can be useful for a growing business with good customers, but they cost money every month and do nothing to fix the process that caused the problem. Fix the process first and you may find you no longer need them.
Debtor Days in Your Annual Accounts
If you file full or abridged accounts, lenders and potential buyers will calculate debtor days from your balance sheet and turnover. They will usually use the textbook formula, which as Brightwell shows can overstate the true figure, especially for a growing business with a VAT registered customer base.
This matters most when you sell. On most business sales the price assumes a normal level of working capital is left in the business, and a buyer who thinks your debtors are unusually high may argue for a lower price or a working capital adjustment. Being able to show monthly count-back figures for the last two years is a much stronger position than arguing about one year end number. Our guide on how to value a business covers the wider picture.
One small point for sole traders using cash basis accounting. Your tax return ignores debtors completely, because income is taxed when received. Your debtor days still matter for cash flow, but you will need to measure them from your invoicing system, not your tax figures.
Common Mistakes
- Comparing VAT inclusive debtors with VAT exclusive sales, which overstates debtor days by around a sixth.
- Using total sales when some are paid upfront, which makes credit control look better than it is.
- Using annual sales in a seasonal or fast growing business. Use count-back or the last three months.
- Looking at debtor days without your payment terms. Days beyond terms is what tells you if there is a problem.
- Chasing the average instead of the biggest debts. Five customers usually explain most of the movement.
- Measuring once a year. By the time the year end figure is out, the problem is ten months old.
How IAK Can Help
We work with small businesses, limited companies and construction companies across North London and Hertfordshire. For many of them, debtor days is the single number that explains why a profitable year left them short of cash.
Our bookkeeping keeps your sales ledger clean and reconciled so the aged debtors report can be trusted. Our management reporting puts count-back debtor days, creditor days and a cash forecast in front of you every month. If you want to know what your real figure is and what it is costing you, get in touch.
Sources
- Late Payment of Commercial Debts (Interest) Act 1998, legislation.gov.uk, the statutory right to interest and compensation on late business payments.
- Late commercial payments: charging interest and debt recovery, GOV.UK, for the 8% plus base rate interest and the £40, £70 and £100 fixed sums.
- Check payment practices, GOV.UK, where large companies publish their average time to pay suppliers under the Reporting on Payment Practices and Performance Regulations 2017.
- Office of the Small Business Commissioner, GOV.UK, for complaints about late payment by large businesses.
- VAT bad debt relief, HMRC VAT Notice 700/18, for the six month rule on reclaiming VAT on unpaid invoices.