How to Reduce Your Debtor Days and Boost Your Cash Flow

Written by Elements Advisory Group
August 29, 2022
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cash flow, debtor days, margin

Cash is the bloodline of every business. An obvious point, we know. Cash keeps the business running. As such, it’s essential to implement strategies to free up cash to ensure the continuous operations of your business and fund its growth.

Setting up a clear and effective billing and collections process is crucial for the success of every business. Unfortunately, many businesses struggle with cash flow due to unpaid invoices and bad debts. To avoid this, careful strategies must be implemented to improve debt collections and reduce debtor days.

Debtor days measure how long it takes for your customers to pay you on average. There are several complex formulas to calculate your debtor days, but you could use this easy formula: 

Debtor days = amount owed by debtors / your annual sales  x 365

For example, say your annual sales are $500,000 and you have debtors owing $90,000. Your average debtor days is 66 ($90,000 / $500,000 x 365). If your payment terms specify that invoices should be paid within 14 days, it’s time to review your collections process as this implies that you have more cash stuck in your lockup longer than it should be. And this could drastically impact your cash flow.

Here are 7 things you can do to reduce your debtor days and free up cash immediately in your business.

  1. Review your Terms of Trade

You should prepare your Terms of Trade and have it signed off by your clients prior to starting a project with them. This document should outline your payment dues after the invoices have been sent out, potential discounts for early payment, late payment implications, warranties, insurance, etc. 

Most businesses give their clients 7-14 days to settle their payments after the invoices were sent. To reduce your debtor days, you need to shorten this timeframe and make sure your clients are clear on and adhere to your payment expectations.

  2. Ask for a deposit prior to commencing work

Asking for a deposit may not be advisable for certain types of businesses and service providers. But if you provide services that span for a long period of time, asking for a deposit before starting a project is good practice.

You can also set progress billing with your clients by setting up project milestones and billing your clients when these milestones are reached. This way, you can ensure a steady inflow of cash to your business while a large project is ongoing.

  3. Bill your clients promptly

Review your billing process and ensure that you are sending out invoices immediately after the delivery of a product or service (within your specified days of settlement). 

Cloud-based accounting software systems, such as  Xero, offer additional features to automate your billing and collections process to eliminate errors from manual encoding, optimise productivity and ease transaction burden. Xero has an automated accounts payable functionality that allows you to set up a workflow for your billing process and lets your clients approve their invoices and get updates when they are due and settle them all in the same system. This provides convenience both for you and your clients.

  4. Offer multiple payment options

Making sure your invoices present all important information clearly, such as due date, status (current or overdue), and bank account details can help you ensure you get paid on time. It’s also best to provide multiple payment methods such as credit card, direct debit or automatic payment to make your payment process more seamless for your customers.

  5. Stay on top of overdue invoices

It’s best to have a process for chasing overdue invoices so you can act early on. As soon as an invoice becomes overdue, you can send out gentle “nudges” to your customers to remind them that their payment due dates have passed. It is advisable to remain calm and considerate when following up on payments. If after several follow-up attempts and your customers still fail to settle their dues, then you can go in with a more direct and demanding approach.

You can also outsource to a debt collector or have a different team member follow up on payments.

  6. Offer discounts for early payments

Everyone loves discounts. But they’re not suited for every business. You could encourage your clients to settle their payments early by giving them discount incentives. Some clients even prefer to prepay their invoices, so make sure you have a prepayment option available. Plus, it would also encourage them to avail more of your products or services if they get discounts. But remember to make sure you only offer feasible discounts based on your profit margins.

On the other hand, you can also charge penalty fees for late payments. Penalties can motivate your clients to avoid paying their invoices late.

  7. Don’t keep working for non-payers

Having clients who don’t settle their payments is detrimental to your business’s health. If you receive late payments consistently from a client, or you have a non-paying client, you may consider suspending your services to them until they settle their dues.

Cash lost in unpaid invoices is worthless and poses risks to the overall health of your business. As a business owner, it’s important that you stay on top of your billing and collections processes to ensure you are getting paid on time and avoid greater loss from unpaid dues. Don’t let your customers treat you as their bank! Ensure you’re getting paid as soon as possible.

Do you need help in setting up strategies to reduce your debtor days? Reach out to our specialists today and let’s look for ways to improve your billing and collections processes and boost your cash flow. Email us at or call us at 07 3878 9181.

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