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What is late payment costing you?
The interest expense and the tied-up liquidity when customers pay late — across the whole portfolio.
DSO is one number. This is what that number costs. If customers pay 24 days late on average, 24 days of revenue is sitting with them instead of in your account — and that money is borrowed, either from the bank or from yourselves. Add the realised losses on top and you have the full price of late payment. That is the figure that belongs in a board paper.
How it is calculated
- Daily revenue is annual revenue divided by 365. Multiplied by the number of days customers pay late, that is the working capital tied up in receivables.
- The cost of capital is what those tied-up funds cost you. If you draw on an overdraft, it is the overdraft rate. If you are self-funded, it is the return the money would otherwise have earned.
- Realised losses are added as a separate line. They are not the same as the delay — but they come from the same source, and they belong in the sum.
- Finally: what ten days of faster payment is worth. That is the number any investment in dunning discipline has to be measured against.
What is often got wrong
- Only the losses get counted
- Write-offs are the visible line, and they are rarely the expensive one. The interest cost on money that sat outstanding too long appears nowhere in the accounts — but it is real.
- Cost of capital is set to the bank rate alone
- If the overdraft is fully drawn, the true price is not the rate — it is the order you could not finance. The opportunity cost is almost always higher than the credit rate.
- The figure is calculated once and filed away
- It is not an analysis, it is a management number. Run quarterly, it shows whether dunning discipline is actually working — or whether it was only decided.
Frequently asked questions
What cost of capital should we use?
If you are drawing on an overdraft, use the overdraft rate. If not, use the return threshold you measure investments against. Somewhere between 5 and 10 % is common — and the point holds at either end of that range.
How many days late do our customers pay?
That is the gap between your payment terms and your actual DSO. If you do not know the number, calculate DSO first — it takes two fields.
Is this not just a liquidity problem?
No. Tied-up working capital costs interest every single day it is tied up, and it costs the opportunities that money could otherwise have funded. It is an operating cost that simply has no line of its own in the income statement.