Days beyond terms (DBT) is the number of days a business takes to pay its bills past the corresponding due date. Lenders use this metric as a proxy for the financial health of a business’s receivables. In invoice factoring, DBT plays a large role in the rate that a business receives on financing.
Why Days Beyond Terms Is Important
A company’s credit rating, which is its financial responsibility track record, is what lenders use to determine whether that firm is worth doing business with. The lower your DBT, the higher your business credit rating will be, and the higher a company’s business credit rating is, the easier it will be for it to borrow money. DBT is one factor that can help business owners understand how invoice factoring works from a lender’s perspective.
How to Calculate Days Beyond Terms
The days beyond terms formula is:
DBT= (sum (payment amounts x days in arrears))/(sum (payment amounts) )
Note: “Days in arrears” will be negative if the payment was made inside the term date.
Days Beyond Terms Calculation Example
In the example below, a small business applying for invoice factoring prepares a DBT calculation for the lender. The five invoices all have different amounts due and were paid at different times as cash became available. Based on these invoices, the DBT would be 3.33, a score acceptable for most invoice factoring companies, but one that may be too high for a bank.
Days in Arrears
The steps of a day beyond terms calculation are:
- Multiply each invoice amount by the days in arrears and sum the resulting values, in this case, the result is $5,000, with invoice 5 contributing to the sum.
- Sum the amount due across all of the invoices for the total due. In this example, the resulting amount is $1,500.
- Take the result from the first step and divide it by the sum of the invoices ($5,000 / $1,500 = 3.33). The resulting number is the DBT.
Tips for Reducing Your Days Beyond Terms
Business owners should invest the time necessary to monitor the days beyond terms of their clients, especially leading up to a factoring application. Common techniques for reducing days beyond terms include monitoring risk, ensuring on-time payments, and even keeping a score for your customers.
- Monitor risk: You need a bird’s-eye view of all your accounts and records before you can make an informed decision about handling your customers who are a liability to your company’s credit score. This will enable you to assess each individual risk better and will tell you which accounts demand more focus.
- Ensure on-time payments: Keep track of your customers’ payment habits, so it’s easier to determine whether a break-in pattern is a potential problem. If a customer who pays before the due date breaks away from the usual pattern and starts paying later and later, this could mean the customer is in a financially stressful situation.
- Score your customers: Once you have an overview of your business’s performance and a DBT for each of your customers, it will be easier to assign a risk score for individual customers to help you determine the financial risk to your company. Scoring your customers in this manner will also give you an idea of which payments to prioritize. You’ll want to reevaluate the terms and conditions you give to risky customers or cut ties with them.
- Analyze your data: You need to analyze your data carefully, and good software can help. You need to see the performance of each of your customers—the size of each account, their payment patterns, and their DBT scores. This will help you make better decisions in terms of credit risk management.
- Compare results with competitors: By comparing how your customers are paying other suppliers, you’ll get a better understanding of the market, whether the terms you’re offering to your customers are on par or whether you need to reevaluate them to suit your needs. Comparing your DBT to that of other companies in the same industry can also help you uncover monthly and yearly trends that can help you make more informed decisions.
Days beyond terms (DBT) refers to the number of days it takes a company to pay its arrears past their due date. The average DBT of a company is important for lenders and financial institutions to determine both its financial health, and whether it’s a suitable candidate to do business with.