The Debtor Days Ratio shows how quickly a company turn the credit sales made into cash. It’s therefore reasonable that the smaller the debtor days ratio, the quicker a company is able to collect cash from its’ clients. Like our article looking creditor days ratio. the DDR provides a good measure of how efficient a firm’s working capital is being put to use.
Debtor Days Formula
There is more than one formula that you can use to calculate the debtor days. To be more specific, the first version of the debtor days calculates the debtor days ratio by dividing the trade debtor (not the whole debtor balance, just the trade debtors) with the credit sales and multiplying the result with 365 (number of days in a year).
Debtor Days= (Trade Debtors/Credit Sales)*365
However, the above formula assumes that information about the credit sales will be available to you. Most of the times, such information is not available in the financial statements. Therefore, if you are an analyst or if you don’t have access to the credit sales figure, an alternative is the following formula:
Debtor Days Ratio = (Trade Debtors/Revenue)*365
As you can imagine, the second ratio will give you a smaller number of days that a company needs to turn its’ sales into cash. The reason for that is that the second formula includes cash sales and not just credit sales, since it includes the total revenue figure and not just credit sales.
Finally, you will also see the debtor days ratio being calculating the average of the opening and the closing debtors for the year.
A DDR Example
The table below includes details for the two hypothetical companies. Company A has managed to generate more sales. However, it also has a larger trade debtors figure.
|Company A||Company B|
The debtor days ratio for first company is as follows:
Debtor Days Ratio : (350,000/5,000,000)*365= around 26 days
However, the debtor days for the second company is :
(150,000/3,000,000)*365= around 18 days
DDR Analysis & Interpretation
What the example above shows is that Company A suffers from a higher number of days that it takes its’ customers to pay for the amounts invoiced. On average, it takes around 8 more days for customers of Company A to pay the amounts outstanding compared to the clients that the company A has.
There are several implication for this which are further analyzed below the most important is that Company A shows a greater ability to collect cash and increase its’ working capital which can be used for the day to day operations.
Why the Ratio is useful
There are many useful things that the debtor days ratio can show. In particular, by calculating, analyzing and interpreting the debtor days ratio, you can gain insight about:
- The company’s efficiency into translating sales into cash.
- The company’s ability to maintain a healthy working capital.
- The possibility that the trade debtors might be bad debt. To be more specific, long overdue debtor balances might be actually potentially bad debt or disputed amounts.
At the same time, it is worth noting that each company has a different client portfolio and different agreements with its’ clients in place. Similarly, different companies from different industries will have significantly different debtor days ratio. Therefore, the specifics of the company and also the industry that a company operates in should be taken into account when comparing more than one company at the same time.
Debtor Days Calculator
The calculator below is very straightforward so please fill in the boxes and you will get the debtor days!