6 ways to reduce debtor days and manage creditor days

Debtor days show how long your customers take to pay you. Creditor days show how long you take to pay your suppliers. To improve both, you need to get paid sooner and avoid paying suppliers before that money comes in. It matters because late payment hits small businesses hard. Small businesses with unpaid invoices are owed £21,400 on average, according to the QuickBooks UK late payments report. Government research also links late payment to around 38 UK business closures every day. This guide explains how to calculate debtor and creditor days, what a good figure looks like and six ways to improve them.

What are debtor days and creditor days?

Debtor days are the average number of days your customers take to pay you after you invoice them. You might also see them called days sales outstanding (DSO). The lower the number, the faster cash comes in. Creditor days are the average number of days you take to pay your suppliers. You might see them called days payables outstanding (DPO). As long as you stay within your agreed terms, a higher number means cash stays in your business for longer.

How do you calculate debtor days?

Divide the amount your customers owe you by your annual credit sales, then multiply by 365. This is the formula HMRC uses when it reviews business accounts.

Debtor days = (trade debtors ÷ annual credit sales) × 365

You'll find your trade debtors on your balance sheet or in your accounting software. Credit sales are only the sales customers didn't pay for straight away. For example, if customers owe you £40,000 and your credit sales for the year are £365,000, your debtor days are 40. If you give customers 30 days to pay, they're paying about 10 days late on average.

How do you calculate creditor days?

Divide the amount you owe your suppliers by your annual credit purchases, then multiply by 365. HMRC uses the same type of calculation for creditors.

Creditor days = (trade creditors ÷ annual credit purchases) × 365

For example, if you owe suppliers £30,000 and you bought £365,000 on credit over the year, your creditor days are 30. If you can't separate out credit purchases, you can use cost of sales instead. Just use the same figure each time so you can compare results. To check a shorter period, such as a quarter, use the figures for that period and multiply by the number of days in it instead of 365.

What is the cash gap?

Your cash gap is your debtor days minus your creditor days. Using the examples above, 40 minus 30 gives a gap of 10 days. That's how long, on average, you've paid your suppliers but are still waiting for your customers to pay you. The smaller the gap, the better. A big gap means you're covering your customers' bills from your own cash. If you hold stock, the time it sits on your shelves adds to the gap too. Our working capital guide shows how stock fits into the picture.

What is a good number of debtor and creditor days?

Good debtor days are close to the payment terms you offer. If your terms are 30 days and your debtor days are 32, most customers are paying on time. If they're 50, a lot of customers are paying late. Good creditor days match the terms your suppliers give you. Paying early means giving up cash you could have kept. Paying late can damage supplier relationships and your credit score. Normal figures vary by industry, so compare yours with your own terms and track them every month or quarter. If your debtor days keep rising, or you're paying suppliers later because cash is tight, act early.

How can you reduce debtor days and manage creditor days?

There are six practical steps you can take. The first helps with your creditor days. The next four help you get paid faster. The last gives you cash while you wait for customers to pay.

1. Negotiate better terms with your suppliers

Longer supplier terms give you more time to collect from your own customers before your bills are due. Moving from 30 day to 45 or 60 day terms can close your cash gap without changing anything else. Suppliers often check your credit score before agreeing terms, and paying on time helps your case. Check your business credit score before you ask, so you know what they're likely to see. Always agree longer terms upfront rather than simply paying late.

2. Set clear payment terms

Customers pay late more often when it isn't clear when payment is due. Put your terms on every quote, order confirmation and invoice, including the due date and how to pay. If you don't agree a date, UK law says payment is late after 30 days. Agreed terms between businesses should usually be no more than 60 days. It also helps to explain your late payment policy from the start. Businesses can charge interest and a fixed fee on late payments, and our credit management compliance checklist shows how much.

3. Credit check customers before you start work

Before you offer a customer credit, check they're likely to pay. A company credit check shows their credit score, payment history, any county court judgments (CCJs) and a suggested credit limit. If their score is low or falling, ask for a deposit, offer shorter terms or set a lower limit. Be careful with large clients who ask for 60 or 90 day terms, and decide whether the work is worth the wait.

4. Offer early payment incentives

A small discount can encourage customers to pay sooner. A common example is "2/10, net 30", which means the customer gets 2% off if they pay within 10 days, or pays the full amount within 30 days. Discounts can be expensive, though. Giving 2% to be paid 20 days early works out at around 37% a year, using the calculation (2 ÷ 98) × (365 ÷ 20). Use them for large invoices or customers who often pay late, rather than for everyone.

5. Make it easy to pay you

Invoices often get paid late simply because they're missed in a busy inbox. A few simple changes help:

• Send invoices as soon as the work is done or the goods are delivered.

• Add a "Pay now" link to your invoices as well as your bank details.

• Offer Direct Debit for regular work, since it's paid automatically on the due date.

• Set up automatic reminders in your accounting software.

You can also connect your accounting software to Capitalise Credit Risk Manager to see the risk behind every unpaid invoice and know who to chase first.

6. Use invoice finance to bridge the gap

Some customers will always take time to pay. Invoice finance gives you up to 90% of an invoice's value as soon as you raise it. You get the rest, minus fees, when your customer pays. For example, if you have £50,000 in unpaid invoices, invoice finance could give you up to £45,000 straight away. It's popular in industries where long payment terms are normal, such as construction, manufacturing and wholesale. If you run a wholesale business, read our guide to trade debtor days for wholesale businesses.

How do debtor and creditor days affect your business credit score?

Your payment record is one of the main things credit agencies and lenders look at. Paying suppliers on time helps your score, while regular late payments can lower it. A lower score can mean higher interest rates, smaller limits or a declined application when you need finance. Suppliers may also offer you shorter terms, which makes your cash gap bigger. Debtor days affect your score less directly. But when customers pay you late, it's harder to pay your own bills on time, so getting paid faster helps protect your score too.

Check your customers' credit before you offer terms

The easiest way to keep debtor days down is to know who you're giving credit to. With Capitalise, you can credit check UK companies, see a suggested credit limit for each one and keep track of your own business credit score.