Client Payment-Term Cost

Why this comes up

A client on Net 60 terms costs you more than an identical client on Net 30, even at the exact same bill rate and margin, because you're financing that extra month of receivables somehow, whether through your own cash or a facility you're explicitly paying for. This engine makes that financing cost concrete and attributable to the specific client whose terms are driving it.

How we calculated this

Financing Cost = Capital Required x Annual Cost of Capital x (Days Outstanding / 365)
Required Surcharge % = Financing Cost / Billings

Worked example: $100,000 capital required, a 12% annual cost of capital, 60 days outstanding, $100,000 billings.

Financing Cost = 100,000 x 0.12 x (60 / 365) = $1,972.60
Required Surcharge = 1,972.60 / 100,000 = 1.97%

What this means

• The required surcharge is the rate premium you'd need to charge this specific client to exactly offset the cost of carrying their payment terms, useful as a concrete number in a terms negotiation.
• This cost scales directly with both days outstanding and your cost of capital; a client on longer terms during a period when your financing costs are higher is a double hit.
• This is a real, attributable cost even if you never actually surcharge the client for it, since it's already being absorbed somewhere in your margin whether it's made visible or not.

Common mistakes

• Treating all clients as costing the same to carry regardless of their actual payment terms, when longer terms are a real, calculable cost specific to that relationship.
• Using a generic cost-of-capital assumption instead of your agency's actual current rate, whether that's a factoring rate, a line-of-credit rate, or your own opportunity cost of cash.
• Negotiating payment terms without knowing what a term change is actually worth in dollars, agreeing to Net 60 without realizing it's a meaningfully different cost than Net 30.

Frequently asked questions

What should I use for "annual cost of capital"?

Your actual factoring or line-of-credit rate if you finance receivables externally, or your best estimate of what that cash would otherwise earn or save if it weren't tied up, if you self-fund.

Should I actually charge this surcharge to the client?

That's a business decision this engine doesn't make for you; the point is to know the number so a terms negotiation, or a decision to price this client differently, is grounded in a real figure.

How does this relate to DSO?

Days outstanding here is effectively this client's own DSO, specific to them rather than your whole book's average; see Staffing DSO for the book-wide figure.

Limitations

Treats days outstanding as a known, fixed figure; a client whose payment behavior is inconsistent may warrant using their worst-case or average actual days rather than their stated terms.

Next decision

• Roll this cost into the client's full profitability picture

Learn more

How to Measure Staffing Client Profitability — why payment-term cost belongs in the real profitability number, not just margin.