My key KPI: Debtor days

My key kpi
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Welcome to ‘My key KPI’, a new weekly content series where we ask CFOs and FDs what metrics and measures they use to drive their businesses forward.

The aim is to understand how different finance professionals, across a broad array of industries and sectors, use data to inform their decision making.

In this week's edition, we hear from Elizabeth Walker, the commercial director of Distinctly, a PR agency based in Watford.
 
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My Key KPI: Debtor days

Distinctly is normally on the other side of journalism. The PR agency helps businesses navigate the maze of press coverage.

The company is currently focused on growth. And with ambitious growth plans, cash has become an important focus for Walker. 

"As with any business, there are a number of KPI's that we pay close attention to on a monthly basis to ensure the smooth running of the agency. But it is cash which makes it possible to achieve those objectives.

"Accordingly, cashflow is particularly important, so we have recently introduced a new KPI into our monthly reporting - Debtor Days."

This is the amount of debtors (less VAT) Distinctly has divided by the turnover of the month, multiplied by 30. "This enables us to keep a close eye on the length of time it takes for clients to settle invoices.

"As an agency in a competitive sector looking to expand aggressively, it's important that we are seen as a good company to do business with, and to this end, we aim to settle all supplier invoices within 48 hours of receiving them. Collecting money efficiently enables us to do this".

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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By tom123
12th Apr 2018 10:43

I too look at debtor days, but, fortunately my software can give me date of invoice and date of payment - so I can get an actual value for time taken to pay.

The traditional debtor days calculation can give some strange figures when sales rise and fall each month.

I also tend to try and concentrate on getting the low value invoices cleared. There is a temptation to just concentrate on the large value ones, but the low value ones cause a lot of noise in the system.

Every account is on stop at 60 days with no 'special' accounts.

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12th Apr 2018 15:47

Lots of the older well-established practices typically have high debtors days (so do some of the newer ones).

I've had clients in the past with so much cash tied up in debtors they could buy a fleet of new Ferrari's in cash.

The reality is though that whilst this cash is tied up in debtors, it isn't being invested into growing the ipractice.

If this is the case, then setting and measuring debtors days as a KPI is a great way to make sure it comes down.

Some of the things they can do to improve it are:

1. Automate invoice reminders e.g. in Xero or using other software such as Chaser.

2. Offer more options for your clients to pay e.g. online, over the phone, in the office. The more opportunity you give them, the less they can resist.

3. Have a dedicated credit controller. The mistake most practices make is letting the partner do the credit control. Most of the time, they never get round to doing it or are too worried about damaging client relationships. Having a dedicated credit controller that you can hold accountable to reducing your debtors days absolutely works. Some of my clients work with Credit chase.

Ultimately, moving to Direct debit is the best long-term strategy for reducing debtors and keeping them down. This is becoming more common for practices, especially with more of them adopting a fixed pricing model.

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19th Apr 2018 18:42

Charles Wiggin - In practice
We have been using two calculations for Debtor days (DSO) for more than 30 years. Coupled with Creditor days (DCO) and stock turn we plot this monthly on a graph to monitor the net working capital movement against changes in activity (principally turnover). We use this for all clients for whom we prepare monthly accounts through our Cloud portal.

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