Payment terms are one of the most consequential financial decisions a distribution business makes, and most distributors make them informally — extending Net-30 to every account that asks, and Net-60 to the ones who push. Without a system to manage the downstream consequences, generous terms quietly destroy cash flow over time.
What Net Terms Actually Mean for Your Cash Flow
When you extend Net-30 to an account, you're providing them a 30-day interest-free loan for every order they place. You've paid your suppliers, warehouse labor, and delivery costs. The account has your product. You won't see money for 30 days — realistically 35 to 45 days if collection isn't managed tightly.
30 accounts on Net-30 terms, each ordering $1,000/week = $30,000 per week in new receivables. At any given time, you have 4-6 weeks outstanding = $120,000 to $180,000 in AR. Extend that to Net-60 and the AR balance doubles. For a distributor with $3M in annual revenue, the difference between disciplined Net-30 management and loose Net-60 management can be $150,000 to $200,000 in additional working capital requirements.
Days Sales Outstanding: Your Most Important AR Metric
DSO = (Total AR Outstanding / Total Credit Sales) x Number of Days
Example for a $3M/year distributor: $180,000 in AR / ($3,000,000 / 365 days) = $180,000 / $8,219 per day = 21.9 days DSO
If your stated terms are Net-30 and your DSO is 42, you're collecting 12 days late on average. That gap represents ($3,000,000 / 365) x 12 = $98,630 in cash tied up in AR longer than it should be.
Track your DSO monthly. A rising DSO number signals collection discipline is slipping or too many accounts are on extended terms they're not managing.
How to Decide Who Gets Which Terms
Prepay or credit card on first 2-3 orders. Every new account should pay on the first 2-3 orders. This establishes that your terms are real and gives you payment history before extending credit.
Net-30 for established accounts with 90+ days of on-time payment history. After 3 months of consistent payment, an account has demonstrated creditworthiness with your business specifically.
Net-60 only for high-volume accounts with long-term relationship history. Net-60 should be reserved for 3-5 anchor accounts who have demonstrated both volume and reliability. Extending it broadly is a cash flow risk.
Credit limits are non-negotiable. Every Net terms account should have a maximum outstanding balance at which you stop shipping until payment is received. If they order $2,000/week, a $4,000 to $8,000 credit limit is appropriate.
How Automated Reminders Change Collection Behavior
For a Net-30 account, an automated sequence looks like this:
- Day 25: "Your invoice of $1,847 is due in 5 days. Pay online here."
- Day 30: "Your invoice of $1,847 is due today. Pay online here."
- Day 37: "Your invoice of $1,847 is 7 days past due. Please remit payment."
- Day 45: Escalation to your AR team for manual follow-up
The Day 25 reminder is the most powerful. It converts a meaningful percentage of would-be late payers into on-time payers — not because they're dishonest, but because they genuinely forgot the due date was approaching.
Distributors who implement automated Net terms reminders typically see DSO improve by 8 to 15 days within 90 days. At $3M annual revenue, that's $65,000 to $120,000 in improved working capital — from software automation alone.