Creditor days are used to calculate the days a company is required to pay all its creditors. Whereas debtor days measure the average amount of days it will take for a business to obtain all payments for the products or services they have sold, which can also be termed accounts receivable days. Accurate bookkeeping includes sending and receiving payments within these timeframes and is the best way to obtain all the necessary and relevant information from which all your accounting is calculated.
Creditor Days
Creditor days are a way for a company to show its creditworthiness to its creditors and suppliers. These days are a way for the company to know how long their creditors and suppliers will wait for their payments to be made.
Within reason, a higher number of days is better for the company since almost all companies wish to conserve their capital as much as possible. However, a business that is especially slow in paying all its bills (for example, taking 100 days or more) could be a company with trouble generating and retaining cash. Even if the company is having trouble financing its operations with its supplier’s funds, a business whose creditor days are in excess will eventually have trouble obtaining and retaining its supplies. Creditor days must be a balanced number of days that allow a company to retain capital and still preserve creditor and supplier relationships through timely payments.
Debtor Days
Debtor days are a way of indicating a business’s efficiency in collecting all their money owed. In these cases, it is beneficial for the company if their debtor days are lower. When the number of debtor days is high, it reflects the company’s inefficiency to collect what is owed. This may also point towards the company’s bad debts or doubtful sales figures. If suppliers do not have confidence in the company, they are less likely to pay invoices that are due.
Ways to Reduce Creditor and Debtor Days
Negotiate Terms
Do not be shy to negotiate and discuss payment terms and conditions with suppliers. You pick your suppliers based on your specific needs and requirements, whether based on price, quality of the product, or speed of delivery. In most cases, the payment terms and conditions are the last things considered when selecting suppliers.
If you have built a good relationship and rapport with your suppliers, negotiating better payment terms should not be a problem. Similarly, this can also help build a rapport with your suppliers, showing them you intend and want to pay them for their supplies in a timely manner.
Offer Discounts
Consider offering discounts or concessions for prompt or early invoice prepayment. For example, if you use invoice finance in your business, you will often end up paying 3% for the first 40 days of the invoice, with 4.5% for 80 days. You could offer this discount to your clients for upfront payment as opposed to delivery.
Change Payment Conditions
Although most businesses are flexible with their payment conditions early in their lifecycle, this leads to problems with working capital over time. When your client-supplier payment terms begin to change, you might face difficulty operating your business. New businesses often start to apply new, shorter payment terms to their new clients to adapt to this change. When they are confident that there is no issue receiving timely payments, they revisit the current payment plan and relax the terms and conditions.
Set Up Automated Reminders
With cloud accounting like Geniac and Xero, several solutions can help a business with automating timely reminders to seek out owed payments and pay outstanding invoices. This automated credit control removes manual reminders and processes and can help protect business cash flow.
Externally Control Credit
Although automated credit reminders can be beneficial, credit control cannot be beaten. If you happen to have a bookkeeper who works part-time, you are likely to find out that you have lengthy debtor days since payments will be made and received only during the hours they work. External credit control enables you to have confidential and quick results that will allow your business to operate efficiently.
Boost Stock Control
To reduce the necessity of working capital, a business must become effectual and efficient in its sales/purchasing cycle. One way to accomplish this is to boost stock control of the company.
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