# Debtor Days

Guide to Understanding Debtor Days

## How to Calculate Debtor Days

Companies that sell products or services to customers can be paid in either cash or on credit.

The debtor days metric, often called days sales outstanding (DSO), pertains to the latter, which refers to when customers make the promise to pay on a future date.

In a credit purchase, the company has provided the product or service to the customer, but no cash payment has been received to date.

Until the customer fulfills the payment obligation in cash, not credit, the amount owed will be recorded as accounts receivable on the balance sheet.

Accounts receivable is an asset on the balance sheet that captures the outstanding credit purchases that have not yet been met, and appears in the current assets section because the collection of the cash is expected to be near-term (<12 months).

Companies with low debtor days are viewed as more efficient in their operations, while companies with high debtor days are perceived as inefficient and might need to implement changes to their business models.

• Low Debtor Days → Quick Collection of Cash Payment from Credit Purchases
• High Debtor Days → Slow, Inefficient Collection of Cash Payment from Credit Purchases

Calculating debtor days involves dividing a company’s receivables amount and dividing it by its credit sales for the corresponding period, followed by multiplying the resulting figure by 365 days.

## Debtor Days Formula

The formula for calculating the debtor days metric is as follows.

###### Debtor Days Formula
• Debtor Days = (Average Accounts Receivables ÷ Credit Sales) × 365 Days

Using a company’s credit sales would be a more accurate metric than its total sales amount, however, the credit sales data may not be readily available, resulting in the total sales metric being the only option.

The reason for using the average accounts receivable, i.e. the average between the beginning and ending period, is that sales data comes from the income statement, which tracks performance across two periods.

In contrast, A/R is from the balance sheet, which is a snapshot of the assets, liabilities, and equity at a specific point in time.

In order to match the timing covered in the numerator and denominator, we use the average, but using the ending balance is acceptable in most cases.

## Debtor Days Calculator — Excel Template

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## Debtor Days Example Calculation

Suppose we’re calculating the debtor days for a company with the following financial data.

• Credit Sales
• 2020 = \$60 million
• 2021 = \$85 million
• Accounts Receivable
• 2020 = \$10 million
• 2021 = \$14 million

The average A/R balance is \$12 million.

• Average A/R = (\$10 million + \$14 million) ÷ 2 = \$12 million

By dividing our average A/R by the credit sales in 2021 and then multiplying by 365, we arrive at an implied debtor days of 52 days.

On average, our company requires 52 days to collect cash from customers that had previously paid using credit as the form of payment.

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