Debtor Days: Formula, What It Measures, and How to Improve Collection Speed

The debtor days formula

Debtor days (also called days sales outstanding, or DSO) is calculated by dividing trade debtors by annual revenue and multiplying by 365. If a company has £150,000 of trade debtors and annual revenue of £1,000,000, its debtor days figure is 54.75 — meaning it takes on average approximately 55 days to collect payment after a sale. These figures are illustrative and not indicative of any lending offer.

Some analysts use monthly revenue multiplied by twelve, or apply average debtors across the year, to smooth seasonal distortions. The key is consistency when comparing periods.

Why debtor days matter

Every additional day of debtor days represents cash that has been earned but not yet received. For a company with £2 million in annual revenue, an increase of ten debtor days ties up approximately £54,800 of additional working capital. That cash must come from somewhere — typically reserves, overdraft, or a creditor funded by delaying supplier payments, which has its own consequences.

High debtor days relative to payment terms agreed with customers signals a credit control problem, customer disputes, or cash-flow difficulties among buyers. Lenders and investors track trends in debtor days as a proxy for the quality of the debtor book and the efficiency of the business's cash collection.

Reducing debtor days in practice

The most direct levers are operational: issuing invoices promptly, stating payment terms clearly, following up systematically on overdue accounts, and applying late payment charges under the Late Payment of Commercial Debts (Interest) Act 1998 where appropriate. Offering multiple payment methods — bank transfer, direct debit mandate, card — removes friction for customers who want to pay promptly.

Where debtor days are structurally high due to the nature of the industry (for example, large corporate buyers who impose 60 or 90-day terms), invoice finance or selective invoice discounting can release the cash tied up in debtors without waiting for the end customer to pay.

Debtor days and lending eligibility

When a business applies for invoice finance, a lender will scrutinise both the debtor days figure and the age profile of individual debtors. Debtors aged beyond 90 days are typically excluded from the eligible pool for funding purposes, as recovery risk increases sharply with age. Concentrated debtor books — where one or two customers represent a disproportionate share — may attract additional concentration limits.