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If you offer Net 60 at the same price as payment on delivery, you are not only selling a service. You are financing the customer, accepting collection work and carrying the possibility of delay or default. The answer is not to reject credit in every case. It is to price it, cap the exposure and measure actual payment behavior instead of relying on the term printed in the contract.
This is a commercial operating framework, not accounting or legal advice. IFRS 9 includes expected credit losses in its impairment requirements for financial assets and commitments to extend credit. A Federal Reserve Banks report on small-business payments also describes timely customer collections as central to cash availability and identifies slow-paying customers as a challenge in some industries. The model below is an internal decision aid; qualified advisers should review the contract and accounting treatment in the relevant jurisdiction.
Separate the four prices hidden inside Net 60
- Time cost: cash used for delivery cannot be reused while the receivable remains outstanding and may need external funding.
- Credit loss: probability of non-payment multiplied by the exposed amount and the loss remaining after enforceable recovery.
- Administration: onboarding checks, invoicing, matching, reminders, dispute work and escalation.
- Behavioral slippage: the difference between contractual and actual payment timing. A Net 30 customer who routinely pays on day 75 may be riskier than a Net 60 customer who reliably pays on day 58.
Avoid double counting. If a fully loaded funding rate already includes a collection charge, do not add the same charge as labor. If default loss is calculated on the invoice balance, remove any verified deposit or enforceable security before applying the loss rate.
Map the deal’s real cash cycle
Start when supplier invoices, payroll or subcontractors must be funded, not when the customer invoice is issued. Delivery may precede acceptance by ten days; invoice approval may take another week; only then does a sixty-day clock begin. Record delivery, acceptance, invoice, due and payment dates. A missing purchase-order reference is an operational defect, not a credit risk that a higher price alone will fix.
Connect the analysis to account-level cost-to-serve, because some customers consume approval and dispute time before they are technically late. Also compare it with B2B margin leakage from quote to collection; a term extended after pricing can remove margin without appearing as a discount.
A hypothetical case: moving from immediate payment to Net 60
Assume a QAR 200,000 contract with a 25% contribution margin before credit cost, or QAR 50,000. The supplier must fund QAR 130,000 of delivery cost before collection. Its internal annual cost of funds is assumed to be 9%, and expected payment arrives after 70 days because actual behavior runs ten days beyond the contractual term.
- Time cost: QAR 130,000 × 9% × 70 ÷ 365 = approximately QAR 2,244.
- Assume a 2% default probability and a 60% loss on the receivable after recoveries: QAR 200,000 × 2% × 60% = QAR 2,400.
- Assume six hours of review and collection at a loaded QAR 120 per hour: QAR 720.
- Total estimated credit cost: QAR 5,364, or 2.68% of contract value.
The contribution margin falls from QAR 50,000 to QAR 44,636 before any other variance. Every figure is hypothetical and is not a market benchmark or a result attributed to Fahad ALNaimi or any company. Test 0.5% and 4% default probabilities, and payment at 60 and 90 days. If a small assumption change reverses the decision, do not force one price: request a deposit, reduce the limit or stage delivery.
Turn the result into a commercial choice
Offer comparable options: an immediate-payment base price, a thirty-day price containing a defined credit cost, or sixty days with a deposit and exposure limit. The customer should understand that it is buying cash-flow flexibility, not facing a mysterious penalty. Sales should not change the term after price approval without a new review; time is part of the price just like quantity and service level.
Set the credit limit on outstanding exposure rather than contract value alone. Three open invoices consume capacity even when each order is individually small. Approval can be tied to the age of the oldest invoice and the disputed share of the balance, not to an unexplained color score.
Measure behavior by customer and segment
A useful monthly view includes average days to pay, the 90th percentile, overdue invoice share, disputed value, realized loss after recoveries, collection hours and limit breaches. Company-wide averages can conceal one large account that consumes most of the working capital.
Separate credit delay from process failure. If the customer rejects invoices because a purchase-order number is missing, repair document flow. If the underlying opportunity is aging and unlikely to close, use an age-adjusted B2B forecast so the cash plan does not depend on revenue that was never won.
Where this model can fail
It fails when a corporate group is treated as one debtor without identifying the paying entity, when default estimates come from a tiny sample, or when the price is increased while invoice disputes remain unresolved. An internal formula is also insufficient where contracts, sector rules or local law constrain interest, penalties or set-off. Obtain specialist review in those cases.
The operating decision is direct: before approving Net 60, calculate time, loss and administration on actual exposure, then choose a priced credit term, a deposit or a staged limit. Review the assumptions after the first three collection cycles. When actual behavior differs, correct the term and price before the next deal rather than waiting for the bank balance to reveal the mistake.
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