Work out credit period cost instantly with clear inputs, formula shown and shareable results.
Offering credit has two costs: financing the receivables balance at your cost of capital, and the bad debts that credit inevitably produces. Together they set the minimum margin uplift that longer terms must generate before they are worth offering.
Receivables investment
Average receivables = Annual credit sales x Credit period / 365
Total credit cost
Cost = (Receivables x Cost of capital) + (Sales x Bad debt rate)
Strictly the variable cost tied up is what you finance, so using sales value is conservative. Many treasurers keep it that way as a risk buffer.
Show that the incremental contribution from the extra sales exceeds this cost. Otherwise the terms are a silent discount.