# Receivables and payment terms > What a 60-day payment term really costs, how to put it in the price, when an early-payment discount pays off, and how DSO shows late payers. - Course: [Finance for Product People: From Unit Economics to Business Cases](https://productovi.com/courses/finance-for-product.md) - Module: How much cash does growth need? - Lesson 14/32, ~28 min - Source: https://productovi.com/courses/finance-for-product/receivables-and-terms ## Free for whom? **Alex Tutor:** On Klasna's product team, a new Teams deal reaches you before anyone signs it. **Leo:** A logistics company wants English for its staff: 240 lessons a month at our usual 800 UAH. They'll sign tomorrow if they can pay in 60 days instead of 30. Same price, so it costs us nothing, right? **Hanna:** It costs them nothing. Every day they don't pay, we're lending them the money, and we pay the tutors meanwhile. **Alex Tutor:** An unpaid invoice is a **receivable**: money the client owes for lessons already delivered. To find what extra days cost, ask what that money costs Klasna. Our credit line charges 24% a year, and in summer we'd be borrowing. $$ \text{Cost of extra days} = \text{Invoice} \times \text{Annual rate} \times \frac{\text{Extra days}}{365} $$ *What it costs to wait longer for an invoice, at the rate Klasna pays for money* **Hanna:** Teams is invoiced quarterly, so one invoice is 240 × 3 × 800 = 576,000 UAH. > **Exercise:** Klasna's money costs 24% a year. How much do **30 extra days** of payment terms on one 576,000 UAH invoice cost Klasna? Round to the kopiyka. ## Put it in the price **Sofia:** 11,362 for one quarter. That's almost 2% of the invoice. **Alex Tutor:** Spread it over the 720 lessons of the quarter and you get the price of patience per lesson. Then you can offer a choice instead of a favor. **Leo:** They'll say nobody else charges for payment terms. **Hanna:** Everybody charges for it. Some just hide it in a higher base price. > **Exercise:** A quarterly Teams invoice covers 720 lessons at 800 UAH. Which price per lesson on 60-day terms leaves Klasna as well off as 800 UAH on 30-day terms, if its money costs 24% a year? **Alex Tutor:** Put the method in order before you use it on the next client. > **Exercise:** A client asks for longer payment terms. Put the steps for pricing them in order. ## Paying to be paid early **Alex Tutor:** Now turn it around. Offer 2% off if they pay within 10 days of the invoice instead of 60. On 576,000 the discount costs Klasna 11,520 UAH, and the money arrives 50 days earlier. **Sofia:** Is 2% cheap or expensive? **Alex Tutor:** Turn it into a yearly rate and compare it with the credit line. You give up 2 for every 98 you receive, for 50 days. $$ \text{Annual cost of the discount} = \frac{2}{98} \times \frac{365}{60 - 10} $$ *2% off for paying on day 10 instead of day 60* > **Exercise:** What is the **annual cost** of offering 2% off for payment within 10 days instead of 60? Use 2 / 98 × 365 / 50 and round to two decimals. **Alex Tutor:** Whether the discount pays off depends on what money costs Klasna at that moment. > **Exercise:** In autumn Klasna has spare cash in a deposit earning 10% a year and won't need to borrow. Should it offer 2% off for paying on day 10 instead of day 60 (about 14.9% a year)? ## When clients pay late **Hanna:** Terms are a promise, not a fact. Some companies pay on day 75 or 80, and nobody notices until the bank is empty. **Leo:** So who chases them? **Hanna:** Today, nobody does. That's the first thing to fix, and the number below tells us where to start. **Alex Tutor:** Track **DSO**, days sales outstanding: receivables divided by the year's sales on credit, times 365. It says how many days of sales are waiting to be paid. **Hanna:** Imagine a year when Teams sells 3,840,000 and 1,180,000 is still unpaid at the end. With quarterly invoices and 60-day terms we'd expect about 105 days: 45 days on average until the invoice, plus 60. > **Exercise:** Teams sells 3,840,000 UAH in a year, and 1,180,000 is unpaid at the end of it. What is the **DSO** in days? Round to two decimals. **Hanna:** Before chasing anyone, know what DSO the terms themselves would give. > **Exercise:** Teams lessons are spread evenly over each quarter and invoiced on its last day, so a lesson waits on average 45 days until the invoice. If clients paid exactly on time on **30-day** terms, what DSO would you expect, in days? ## Only if they pay on time? **Leo:** Fine, late payers cost us. But a client who pays exactly on day 60 is a good client, isn't it? **Alex Tutor:** A reliable one, yes. Reliability and cost are different questions, though. **Hanna:** Even on time, we fund their lessons for two extra months. Check the formula again before you answer. > **Exercise:** **True or false:** giving 60-day terms instead of 30 costs Klasna nothing, as long as the client pays exactly on day 60. ## Your turn: the offer **Leo:** Write me the offer I can send them today. I don't want to lose the deal, and I don't want to fund it for free. **Alex Tutor:** Give them options with prices, say what the 60 days cost, and keep one choice that's good for both sides. **Sofia:** A choice, not a favor. > **Exercise:** The logistics company wants 240 Teams lessons a month at 800 UAH, invoiced quarterly (576,000 UAH), and asks to pay in 60 days instead of 30. Klasna's money costs 24% a year. Write the offer Leo can send the logistics company (3–5 sentences): options with prices, what the 60 days cost, and one choice that's good for both sides. > **Key ideas** > > - A receivable is a loan to the client. Its cost = invoice × the rate your money costs × extra days ÷ 365. > - 30 extra days on a 576,000 UAH invoice at 24% a year cost 11,362.19, or 15.78 per lesson: price 60-day terms at about 816 instead of 800, or offer the choice. > - An early-payment discount of 2% for paying 50 days sooner costs 14.90% a year. If borrowing costs 24%, the discount is the cheaper money. > - **DSO** = receivables ÷ yearly credit sales × 365. Compare it with what the terms promise: 112 days against about 105 expected means some clients pay late. > - Terms cost money even when clients pay on time. Late payment adds to it. **Alex Tutor:** Next we put all of this into one plan: twelve months of cash, with every lag and every season in it. - Previous lesson: [Working capital: who pays whom first](https://productovi.com/courses/finance-for-product/working-capital.md) - Next lesson: [A twelve-month cash flow forecast](https://productovi.com/courses/finance-for-product/twelve-month-cash-plan.md) --- Productovi Learning. Free, no sign-up needed to read.