Merriam -Webster defines opportunity cost as the "cost of making an investment that is the difference between the return on one investment and the return on an alternative." By carrying high aging receivables, your actual return on investment is significantly lower than your return on investment would be if you were able to reinvest the cash when it came in sooner. The opportunity cost of lost potential sales is the truly damaging property of long outstanding accounts receivable.
The effect of opportunity cost can easily be seen in the following example of a previous client of ours who was involved in the heavy machinery rental business. When the company lent its equipment to slow paying customers, the equipment would sit idle at job sites while quick paying customers went without equipment because it was already loaned out.
Had our client sold first to those customers who would pay in quick terms, they would be able to turn their cash around faster. This would allow them to reinvest in more machinery to facilitate those who pay in quick terms, further increasing company sales. Instead of having the company's cash sit idle, cash stream and growth would increase.
“An equity investment of any kind can often seem like the easy way to go at first. However, giving up a portion of your company is a very permanent thing. Some situations truly call for an equity partner to come in. However, in the case where working capital is needed, Prairie’s factoring or purchase order financing programs should be considered.”
- Dylan Morgan, Executive Vice President
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"Our company had expenses to pay before our customer would pay us. We were looking for alternative financing. Prairie Business Credit was highly recommended from our bankers. Prairie Business Credit completed what they promised and helped us grow. They are very supportive partners."
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