Profit Is Not Cash: The Hidden Cost of Credit and Delayed Payments
The Hidden Cost of Credit and Delayed Payments Let's take a very simple example. You are running a trading business. You purchase goods worth ₹1,00,000 from your supplier. Your supplier gives you 30 days credit. You sell those goods on the same day for ₹1,10,000. If the customer pays you immediately, you are in a very comfortable position. You have ₹1,10,000 in your bank, while you have to pay your supplier ₹1,00,000 only after 30 days. For those 30 days, the money is available with you. You can purchase more goods, use it in the business, or even keep it in the bank and earn some interest. After 30 days, you pay your supplier. Simple. This is almost the perfect cash-flow situation for a trading business. Of course, real business doesn't usually work like this. Now sell the same goods on credit Let's change just one thing. Instead of taking immediate payment from your customer, you give the customer 30 days credit. Now the cycle becomes: Supplier gives you 30 days → You se...