Having an accurate set of accounts is one thing, but being able to extract important information from them quickly is vital. Challenge No. 6 was credit management – how can you measure how well this is going without poring over lists of aged debtors for hours on end?
One of the common accounting ratios is “debtor days”. This is simply
Debtors x 365
This allows you to measure how many debtors you are carrying in proportion to your sales. A bald figure is not necessarily helpful – it will vary with the kind of business and with the particular business concerned. A supermarket is likely have a lower figure than a solicitors firm, for example.
The ratio comes into its own in making comparisons, either internally or externally. If the ratio improves compared to the same period last year, or to the last quarter, this may be a good sign. Some thought will be necessary as to the reasons. Externally, you can potentially compare your figure with others in the industry or your competitors. The figures may be available from public accounts, or your accountant or bank may have a feel for what is the ball park expectation.
Obviously, any measure is only useful if it leads you to make any necessary adjustments in your business.