Debtor Days & Working Capital
I was having coffee with a business owner discussing their business’s working capital requirements. We discussed what cash is required in the business. That is, is there sufficient cash in the business for it to run smoothly. The last thing a business owner wants is a full-time job managing cash flow. Business’s need to focus on their core purpose.
The client’s business is highly seasonal which makes managing cash flow at times quite challenging. Our conversation quickly changed to debtor days. We both agonised over some very slow debtors. Debtor days is the average number of days a customer takes to pay.
We discussed the impact of debtor days on the business’s working capital requirements.
We quickly sketched out a plan of action on how we would not only stop the declining trend but have a significant reduction in debtor days. The solution being a combination of increased staff education and engagement, technology and a number of telephone calls.
Here's a quick calculation to demonstrate the impact of debtor’s days on working capital.
If a business is turning $2M in sales and debtor days are 55, then by reducing the average time for a debtor to pay by 10 days to 45 days, there is an additional increase in working capital of $54,000. Not a bad return on investment over a coffee!!!