Many businesses extend credit to customers, to provide the services and products they need.
According to a 2019 report on the economic well-being of U.S. households, 33% of adults are either unable to pay their bills or are one modest financial setback away from hardship. 4 in 10 adults would have serious difficulty covering a $400 expense, and most commonly make payments on credit cards or borrowing from friends or family.
It can be difficult to turn away customers in need, and additionally difficult to turn away a customer who can pay at least on credit. However, carrying accounts receivable on the customer’s behalf will undoubtedly have a negative effect on a business.
When the business extends credit to customers without having a solution to collect accounts receivable, they take on administrative costs, opportunity costs, and the risk of heavy debt among other cost elements, according to a study by the Harvard Business Review.
Let’s take a look at the different costs of carrying accounts receivable and how they negatively impact a business.
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