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