How to use the count back method for debtor days

Hi, I would like to understand how I apply the counting back method to calculate debtor days.

• Buying Farmland through income

After reading quite a lot online I am still unsure of how to use the count back method when calculating debtor days. I feel like this method is needed for a more accurate result.

Any help would be greatly appreciated :)

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08th Jan 2022 09:19

Yes, the count back method is more accurate but it does need a bit more info to calculate. It’s also only normally needed where sales are very irregular.

Example (VAT adjustments ignored for ease):

Debtors 100

Sales:
Month 12 30
Month 11 60
Month 10 20

Debtor months using countback method 2.5.

If annual sales were say 400, then debtor months using annualised calculation would be 3.0.

If sales were skewed towards the start of the year and were say 600, then debtor months would be 2.0.

As can be seen, the calculations are still in the same ballpark so it actually needs a massive skew on sales to make much of a difference.

Thanks (2)
By accountaholic
10th Jan 2022 13:20

Depends on the purpose - If comparing annual accounts across years or of different companies, you usually only have the info for an annualised calculation.
For management advice purposes I would always recommend the countback method. Once you have your spreadsheet set up, key the figures in each month and you can easily calculate the figure each month and monitor trends, and easy then to calculate a cash collection target to get the days down by the next month or quarter end.

Personally I wouldn't count 2.0 (60 days), 2.5 (75 day) and 3.0 (90 days) as in the same ballpark. Getting down from 90 to 60 days is an immediate cash injection of one month's sales value.

Depends on the business too, if they have 10, 100 or 1000 customers the whole discussion on days can have a different focus.

Thanks (0)
11th Jan 2022 13:02

Yes, I wasn't intending to downplay the importance of getting the cash in.

My point was that the calculation is fundamentally an approximate one and it is a mistake to place too much weight on the absolute numbers: personally, I would say that 75 +/- 15 days is pretty much the same thing given the inherent uncertainties, but I appreciate mine may be a minority view.

Far more important (in my opinion) to consider the direction of travel of your numbers rather than the numbers themselves.

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