Debtor Days Formula is used for calculating the average days required for receiving the payments from the customers against the invoices issued and it is calculated by dividing trade receivable by the annual credit sales and then multiplying the resultant with a total number of days.
What is Debtor Days Formula?
The term “debtor days” refers to the number of days that a company takes to collect cash from its credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. , which is indicative of the company’s liquidity position and its collections department’s efficiency. It is also known as days sales outstandingDays Sales OutstandingDays sales outstanding portrays the company's efficiency to recover its credit sales bills from the debtors. The number of days debtors took to make the payment is computed by multiplying the fraction of accounts receivables to net credit sales with 365 days. (DSO) or receivable days. The debtor days ratio calculation is done by dividing the average accounts receivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet. by the annual total sales and multiplied by 365 days.
Receivable Days Formula can also be expressed as average accounts receivable by average daily sales.
Receivable Days Formula is represented as,
Debtor Days Ratio = (Average accounts receivable / Average daily sales)
The debtor days formula calculation is done by using the following steps:
- Firstly, determine the average accounts receivable of the company. The average accounts receivable is computed by adding the receivable amount at the beginning of the year with that of the end of the year and then dividing the result by two. Both information can be collected from the balance sheet of the companyBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company..
Average accounts receivable = (Opening accounts receivable + Closing accounts receivable) / 2
- Next, determine the total annual sales of the company, which is easily available as a line item in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. of the company. Further, the average daily sales can also be calculated by dividing the annual total sales by 365 days (number of days in a year).
Average daily sales = Annual total sales / 365
- Finally, the debtor days ratio calculation is done by dividing the average accounts receivable by the total annual sales and then multiply by 365 days. Receivable Days Formula can also be calculated by dividing the average accounts receivable by the average daily sales.
Debtor days formula = (Average accounts receivable / Annual total sales) * 365 days
Debtor days Ratio Calculation = (Average accounts receivable / Average daily sales)
Examples of Debtor Days Formula (with Excel Template)
Let’s see some simple to advanced examples of Debtor Days Calculation to understand it better.
Let us take the example of David, who is a garment retailer and often offers credit to his customers. David is known for selling to customers on credit with the expectation that these customers would payback for the merchandise within the next 30 days. Although most of the customers pay for their goods promptly, there are some who are late. Calculate the debtor days ratio considering that at the end of the financial year, the statements recorded the following accounts:
- Average Accounts Receivable: $30,000
- Annual total sales: $210,000
Below is given data for calculation of Days Sales Outstanding
Therefore, Debtor Days can be calculated as,
DSO = (Average accounts receivable / Annual total sales) * 365 days
= ($30,000 / $210,000) * 365 days
The DSO has gone up to 52 days due to some delinquent customers.
Let us take another example of ABC Ltd that reported a total annual sales of $2,500,000 for the year ending 31st December 2016. The accounts receivable at the beginning of the year was $900,000, and the balance at the year closing is $700,000. Determine the Days Sales Outstanding of ABC Ltd based on the given information.
- Total annual sales = $2,500,000
- Average accounts receivable = ($900,000 + $700,000) / 2 = $800,000
Given the table shows data for the calculation of Debtor Days Ratio of company ABC Ltd.
Therefore, DSO for ABC Ltd can be calculated as,
Days Sales Outstanding = (Average accounts receivable / Annual total sales) * 365 days
= ($800,000 / $2,500,000) * 365 days
Days Sales Outstanding for ABC Ltd will be –
DSO = 116.8 days ~ 117 days
Debtor Days Formula Calculator
You can use these Debtor Days Formula Calculator
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Relevance and Use
It is very important for a company, because if the debtor days ratio is increasing beyond the stated trading terms, then it can be indicative of the fact that either the company is not able to collect its debts from customers efficiently enough or maybe that the terms are being changed to boost sales. A lower debtor day is favorable as it indicates that the company can collect the cash earlier from customers and that the accounts receivables are good, which means that it is not required to be written off as bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation..
On the other hand, if there is an upward trend witnessed in the debtor ratio, then it means that an increasing amount of cash is required in the form of working capital to finance the business, which can be a problem for growing businesses. However, it is important to note that the average varies from industry to industry, although most of the business complaint that debtors usually take too long to pay in almost every market.
Nevertheless, Days Sales Outstanding also comes with a set of limitations, such as an analyst should compare it for companies within the same industry. Ideally, if the companies have the same business model and revenue, then a comparison makes more sense.
This has been a guide to Debtor Days Formula. Here we discuss how to calculate Debtor Days Ratio and its formula along with practical examples and a downloadable excel sheet. You can learn more about accounting from the following articles –