Receivables are the hidden enemy of any business model. In theory, receivables should be zero—you sell a product or deliver a service and get paid. But markets evolve habits, and extended payment terms become common.
Long payment terms distort profitability:
- Profit appears higher than it truly is because financing costs are not reflected.
- The business model may only appear viable because of long credit terms.
- Granting credit is equivalent to acting as a bank without being qualified to manage risk.
- Customer insolvency becomes your loss.
- Long credit terms become difficult to reverse.
- When receivables grow too large, you cannot stop supply without risking total loss.
- Using borrowed funds to finance customer credit destroys profitability.
Receivable management is too important to leave solely to accounting or sales. Leadership must manage it directly.
Even a symbolic bank guarantee helps enforce discipline. Because calling a guarantee damages a customer’s reputation severely, it creates leverage that encourages responsibility.
That article came from the experiments we have conducted over the years.
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