Strong sales are important. But sales do not fund a business until the cash is collected.

When customers consistently pay beyond agreed terms, the business is effectively providing them with additional, interest-free working capital.

For companies with significant credit sales, even relatively small movements in collection times can tie up or release substantial amounts of cash.

That is why debtor days should be viewed as a management and working-capital KPI, not simply an accounting statistic.

What Are Your Debtor Days Telling You?

Debtor days measure how quickly credit sales are converted into cash.

If standard payment terms are 30 days but customers are paying, on average, after 45 or 50 days, the difference can become material very quickly.

For example, a business generating €10 million in annual credit sales has average daily sales of approximately €27,400.

Reducing average debtor days by five days could potentially accelerate the collection of approximately €137,000 of cash.

For directors, the important question is therefore not simply: How much are our customers owing us? It is: How efficiently are we converting revenue into cash?

Look Beyond the Headline Debtor Balance

An increasing debtor balance is not necessarily a problem. It may simply reflect business growth.

What matters is understanding the quality and ageing of that balance.

Management should have clear visibility over:

• average debtor days and the direction of travel;
• amounts outside agreed credit terms;
• 60-day and 90-day-plus balances;
• customers that consistently pay late;
• disputed or queried invoices;
• concentration of receivables across major customers; and
• the level of debt that may ultimately prove difficult to collect.

Looking at these measures together gives management a much clearer picture than reviewing the total debtor balance in isolation.

Late Payment Is Not Always a Customer Problem

One of the most useful questions a finance team can ask is: Why are customers paying late?

Sometimes the answer is simply poor payment behaviour. But often the underlying cause sits within the supplier’s own processes.

Common issues can include:

• invoices being raised late;
• incorrect invoice details or purchase-order references;
• invoices being sent to the wrong person;
• unresolved customer disputes;
• unclear payment terms;
• delays in approving credit notes;
• no clear internal responsibility for collections; or
• sales teams agreeing commercial terms without sufficient consideration of credit risk.

Improving debtor performance therefore often requires more than increasing the number of collection calls.

It requires improving the process from customer onboarding and contracting through to invoicing, dispute resolution and collection.

Are Your Credit Terms Still Appropriate?

Credit terms should evolve as customer relationships and transaction values change.

A customer that represented a €20,000 exposure several years ago may now regularly owe €200,000 or more.

At that point, the credit risk has changed even if the relationship has not.

Businesses should periodically review:

• the level of credit being extended;
• agreed payment terms;
• the customer’s payment history;
• financial strength and creditworthiness; and
• whether the level of exposure remains appropriate.

The objective is not necessarily to reduce credit terms for every customer.

It is to ensure that the credit being extended is intentional rather than accidental.

Make Collections Part of the Management Rhythm

Effective credit control should not begin when an invoice becomes seriously overdue.

High-performing finance teams typically monitor debtors as part of the normal management cycle.

That can include:

• issuing invoices promptly and accurately;
• confirming that invoices have been received and approved;
• following up before or immediately after the due date;
• assigning responsibility for larger overdue balances;
• escalating disputes quickly;
• agreeing payment plans where appropriate; and
• reviewing aged debt regularly at management level.

For larger businesses, it can also be useful to identify the customers responsible for the greatest movements in debtor days each month.

This makes the conversation more focused and helps management distinguish between a broad deterioration in collections and a small number of specific issues.

Link Debtors to Cash-Flow Forecasting

Debtor management should not be considered in isolation.

Collection assumptions feed directly into the company’s cash-flow forecast and wider working-capital requirements.

A business may report strong revenue growth and profitability while simultaneously experiencing increasing cash pressure if customer payment times deteriorate.

That can result in additional overdraft usage, increased borrowing or reduced capacity to invest.

For growing companies in particular, understanding the relationship between sales growth, debtor days and cash requirements is essential.

Small Improvements Can Release Significant Cash

Improving debtor days does not necessarily require aggressive collections.

Often, the biggest gains come from better processes, clearer accountability and earlier intervention.

For an established business with significant credit sales, reducing debtor days by even a few days can release meaningful cash without increasing sales, cutting costs or raising additional finance.

At Gallagher Keane, we work with businesses to improve management reporting, cash-flow forecasting, working-capital visibility and financial processes.

This includes helping management teams better understand their debtor position, identify the causes of slow collections and put processes in place to convert revenue into cash more efficiently.

If you would like to review your debtor position, working-capital performance or cash-flow processes, speak with the Gallagher Keane team.

info@gallagherkeane.ie