Myths of High Margin in Credit Sales
General Market Opinion is that our Customers are not price-sensitive when they purchase on Credit, so as Businesses, we tend to gain higher Profit Margin and higher sales turnover on Credit Sales.
Credit Sales Scenario
Customer purchases goods worth of 1,00,000 rs and Cost is 88,000, the profit would be 12,000 rs ( 12% Profit Margin) payment after 90 days.
Cash Sales Scenario
Customer purchases goods worth of 95,040 rs and Cost is 88,000, the profit would be 7,040 rs ( 8% Profit Margin) cash Payment
From this transaction, it is evident that the Credit sale has a higher profit margin but what is not very obvious is
Loss of Opportunity – If sold in Cash, the sales turnover could be 3 times in 90 days so Profit gained would be 24% instead of 12%
Cash Sales has Zero Risk while Credit Sales could be converted to Bad Debts ( Loss of Profit and Cost of Goods) or return of Goods
Cash in Hand from Cash Sales would enable us to Purchase other products (Diversify) and increase sales turnover.