Most business owners are driven by sales targets and to meet these targets they may be tempted to offer extended payment terms.
For example, if your business grants a customer time to pay – say 60 days – after the services or goods supplied have been delivered, effectively, your money stays in their bank account for 60 days.
Further, if you have incurred costs regarding a sale, which have to be paid for before your customer settles their bill, you are out of pocket until your account is settled.
There is a well-worn cliché in business that cash is king. Business owners should keep a weather eye on the effectiveness of their efforts to turn a sale into cash in the bank. Amounts owed by customers may look like a useful buffer – cash to come in in future months – but you cannot spend or invest trade debtors.
Once you have made a sale, if you allow customers extended credit terms you are basically saying it is OK to leave your money in their bank accounts.
A further, major risk from offering over generous credit terms is over-trading. As mentioned above, if you have to pay for your goods and services on terms less generous than those you offer your customers, you will run out of spending power unless you have substantial cash reserves.
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.