When Sales Growth Becomes Customer Financing

01Revenue Is Not the Same as Economic Value

A customer can generate attractive revenue and gross profit while consuming substantial working capital.

Consider two customers with identical annual sales and gross margins.

Illustrative example. Receivables are estimated using revenue ÷ 365 × collection days. Financing cost assumes a 10% annual cost of capital and is shown for comparison, not as an accounting gross-profit adjustment.

Both customers generate the same accounting gross profit.

But Customer B requires approximately $329,000 more capital to support the relationship.

At a 10% annual financing cost, that creates approximately $33,000 of additional financing cost.

The longer payment terms may still be worthwhile.

Perhaps Customer B offers higher future growth, more predictable demand or lower servicing costs.

But those benefits should be demonstrated, not assumed.

02When a Commercial Exception Becomes Permanent

Payment terms are often negotiated when the business needs to acquire or retain a customer.

Once approved, they can remain unchanged for years.

The customer's purchasing volume may decline. The expected growth may never materialize. The competitive conditions that justified the original concession may disappear.

Yet the credit terms remain.

What began as a strategic commercial investment becomes a permanent financing arrangement.

The business may continue treating the customer as highly profitable because management reviews revenue and gross margin without examining the capital required to support those sales.

03The Risk Beyond DSO

DSO is an important measure, but it cannot tell the entire story.

A company with stable DSO may still face substantial collection risk if a large proportion of receivables is concentrated in one customer.

Likewise, a customer may pay within agreed terms while still requiring an economically unattractive amount of financing.

A stronger customer review should consider:

• Gross profit and contribution margin
• Actual collection performance against contractual terms
• Average receivables and financing cost
• Customer concentration and credit risk
• Discounts, returns and servicing costs
• Strategic value and future growth potential

The purpose is not to reject customers who request longer payment terms.

It is to understand what the business is receiving in exchange for providing that credit.

04Credit Terms Are a Commercial Decision

Accounts Receivable is often viewed as the responsibility of the Finance or Accounting team.

But many receivable problems originate much earlier, during commercial negotiations.

Sales negotiates the payment terms.

Operations delivers the product or service.

Finance manages the resulting cash requirement and collection risk.

If commercial teams are rewarded only for revenue, they may have little incentive to consider the working capital consequences of their decisions.

A more balanced approach connects customer growth with profitability, cash conversion and risk.

For significant credit concessions, management should evaluate whether the expected commercial benefit exceeds the incremental financing cost and risk.

The question is not simply how much revenue a customer generates. It is how much capital the business must commit to earn that revenue — and whether the return justifies it.