Creditor days is used for the purpose of calculating the days a company is required to pay all of their 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. It can also be termed as accounts receivable days. Bookkeeping will provide all of the necessary and relevant information from which all of your accounts are formulated.
Creditor days is 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 will be better for the company. This is because all companies wish to conserve their cash. Still then, a business that is found to be especially slow in paying all of their bills (for example, taking 100 days or more), could be a company that has trouble generating cash. Maybe the company is having trouble financing its operations with their supplier’s funds. In the end, a business whose creditor days are in excess will eventually have trouble in obtaining their supplies.
Debtor days is a way of indicating a business’s efficiency in collecting all of their money owed. In such cases, it will be beneficial for the company if their debtor days are lower. When the number of debtor days is high, it reflects on the company’s inefficiency. It may also point towards the company’s bad debts or doubtful sales figures.
Different Ways to Reduce Creditor and Debtor Days
Negotiate and Discuss Payment Terms and Conditions with Suppliers
You pick your suppliers based on your specific needs and requirements, whether it’s about price, quality of the product, or simply speed of delivery. In most cases, the payment terms and conditions are the last thing 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 for you.
Offer Discounts and Concessions For Prompt or Early Repayment
If you use invoice finance in your business, you 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 in cases of payment upfront vs. delivery.
Change Payment Conditions And Terms
Although the majority of businesses in their early lifecycle are found to be flexible in terms of their payment conditions, over time this leads to problems with working capital. Just as your client/supplier payment terms start to stretch, you might face difficulty running your business. New businesses start to apply short, new payment terms to all of their new clienteles they have on board. When they are confident that there is no such issue, they revisit their clients and change their terms and conditions.
Set Up Chasers, Automate Credit Control
With the introduction of cloud accounting, like Geniac and Xero, there are now several solutions available that help a business with automating timely reminders.
Credit Control Externally
Although automated credit chasers can be extremely helpful, 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. With the help of external credit control, you will not only have confidential, but quick results.
Boost Stock Control
In order to reduce the necessity of working capital, a business must become effectual and efficient in their sales/purchasing cycle.
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