Understand your volume of transactions and how much of those transactions are on terms.
Businesses that run on thin margins can usually least afford the extension of credit to their clients. Businesses with healthier margins can typically better afford the extension of credit. Typically, the better the margins, the safer you are extending credit. Build into your margins your own cost of capital. If you offer interest-free terms but are financing inventory on credit cards paying 19% interest, then you are significantly impacting your margins, even if every customer pays on time. If you have factored in a certain level of default, factor in the cost of collections when evaluating your overall operating margins.
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