Your business grants a customer a time to pay, for example, 30 days after goods or services have been delivered. This would essentially mean that the money (cash) stays in their bank account for 30 days.
Further, if you have incurred costs regarding a sale, that have to be paid for before your customer settles their bill, you are out of pocket until your account is settled.
Business owners are driven by sales targets and to meet these targets many are tempted to offer extended payment terms.
Your business only has choices – regarding it’s sales – once your customers’ money is in your bank account.
Once you’ve made a sale, if you allow customers extended credit terms you’re basically saying it’s OK to leave your money in their bank accounts.
The major risk from offering over generous credit terms is over-trading. Paying for good and services on less generous terms than you offer your customers means you will run out of spending power. That is unless you have substantial cash reserves.
Recent economic challenges have bleached away many rainy-day funds. So, our ability to leave cash in customers’ bank accounts may place us in a position where we basically become cash insolvent. That’s even if we are profitable and have surplus net assets.
The next time you are tempted to extend credit in order to win a sale, take advice. We can help you consider the wider consequences of your sales strategy and its impact on cash flow.