How Good Is Your Business At Collecting It's Debts??

In any business cash is extremely important, so you will need to know how effective your business is in collecting it's debts. The debtors turnover ratio will give you the average number of days credit taken by customers and this can be compared to previous periods to see if performance has improved or worsened.

Example
For the year to 31/12/08 a business has a turnover of £1,300,000 and it's debtors at that date were £125,000.
For the year to 31/12/09 the business has a turnover of £1,500,000 and it's debtors at that date were £190,000.

125,000
1,300,000 x 365 = 35.10 days for 2008

190,000
1,500,000 x 365 = 46.23 days for 2009

So from the example you will see that the business has become less effective in collecting it's debts, it is taking an extra 11 days to collect money from it's customers. Assuming the credit period allowed is 30 days then something needs to be done to correct the situation and bring it back into line, if the situation is allowed to deteriorate it could cause cash flow issues.