Effects of Late or Non-payments/Opportunity Cost and Alternate Use of Capital

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Globe for WikiEducator.jpg Unit 3.3- Effects of Late or Non-payments 

Introduction | Tenets of Risk Assessment | Risk and Reward | "Eight C's" | 5 "C's" | 3 "C's" | Applying the "C's" | Impact of Nonpayment | Identifying Costs | Bad Debt Value | Interest | Cost and Capital | Administrative | Summary | Resources | Activities | Assessment

Opportunity Cost and, Alternate Use of Capital

Consider an example using a yearly sales figure of $12,000,000 or $33,000 per day. If you were receiving $33,000 in cash every day, you would have the opportunity to invest that money back into your business by making more product, investing in marketing, creating a new product line, purchasing new equipment, and investing in internal improvements for employees.

However, if you extend credit to a buyer and agree to wait for that $33,000, you are missing the opportunity those investments could yield. Depending on the investment, the opportunity cost would vary.

Therefore, the goal is to gain access to your $33,000 per day as soon as possible. One way to do this is to reduce your DSO (day’s sales outstanding). If you are currently receiving your daily $33,000 45 days after the sale and you reduce that 45 DSO to 30, you have just gained access to approximately $500,000 that you could invest sooner rather than later. Sooner could mean the difference between getting into the Chinese market or not.