Guide

What a customer paying 45 days late actually costs you

Slow payers don't just annoy you, they eat margin. Here's the formula to put a real dollar figure on it, worked through with actual numbers.

You probably know slow payment is bad. Most owner-operators can't say how bad, in dollars. That's a problem, because "he always pays eventually" hides a real cost that sits on top of every job you do for that customer. Once you can price it, you can decide what to do about it.

The two costs hiding in a late payment

There are two separate costs, and most people only think about one of them.

• Carrying cost. Until the invoice is paid, you're financing the customer's job with your own money, either cash sitting idle that could be earning, or a line of credit you're paying interest on. Every extra day unpaid is a day of interest.
• Chase cost. Your time (or your admin's time) spent phoning, texting, emailing and re-invoicing. That time has a loaded hourly rate, and it's time not spent quoting, running jobs, or going home.

Add them together and you get the true cost of "they always pay eventually."

The formula

Carrying cost:

Carrying cost = Invoice value × (annual cost of capital ÷ 365) × days late

"Days late" here means days beyond your agreed terms, not total days to pay. If your terms are net 7 and they pay on day 52, that's 45 days late.

Chase cost:

Chase cost = number of follow-ups × minutes per follow-up × loaded hourly rate ÷ 60

Loaded hourly rate means what it actually costs you to put that person's time on this task, including overheads, not just their wage. If you don't know your loaded rate, the hourly rate calculator will get you there.

Worked example: $4,000 invoice, 45 days late

Say your terms are net 7 and a customer pays on day 52 instead. Your cost of capital is 12% a year (a reasonable stand-in for a business line of credit or overdraft, or the return you'd get putting that cash to work elsewhere).

Item	Figure
Invoice value	$4,000
Terms	Net 7
Actual payment day	Day 52
Days late	45
Annual cost of capital	12%
Daily rate (12% ÷ 365)	0.0329%
Carrying cost	$4,000 × 0.000329 × 45 = $59.10

Now add the chase. Say it took five follow-ups (a call, two texts, a "friendly reminder" email, one awkward doorstep chat) averaging 12 minutes each, at a loaded rate of $85/hour:

5 × 12 minutes = 60 minutes = 1 hour × $85 = $85

Total cost of this one late payment: $59.10 + $85 = $144.10, or about 3.6% of the invoice. If your admin is slower or less confident chasing money and it takes 8 follow-ups instead of 5, that's another $57, pushing the total to roughly $201, or 5%.

For comparison, most card processors charge 2.6-3.5% to get paid instantly. A customer who pays 45 days late is often costing you more than the fee you'd pay to just take their card up front.

The materials-float version

If the job involves buying materials, the real damage is worse than the invoice-based number above, because your cash goes out on day 0, not on the day you invoice.

Take a $4,000 job where $1,800 is materials you paid for upfront, and the customer pays you on day 51. You're not financing the gap between invoice and payment, you're financing the whole 51 days on that $1,800.

$1,800 × 0.000329 × 51 = $30.20 just on the materials float, before you even add the labour-and-margin carrying cost or the chase time. On thin-margin jobs (say a 15% margin), that $30 can be a meaningful chunk of what you actually take home. Run the numbers on a specific job through the job profitability calculator if you want to see how float and delay eat into a margin you thought was solid.

Why this compounds if it's not a one-off

One slow payer costing you $150 is annoying but survivable. The real cost shows up when a customer does this on every job, or when several customers do. If you run, say, 40 jobs a year averaging $3,500 and a third of your customers routinely pay 30-45 days late, you could be carrying $1,200-$2,500 a year in avoidable financing and chase cost, money that never shows up as a line item anywhere, it just quietly lowers your margin.

It also distorts your cash position even if every invoice eventually gets paid in full. You can be fully profitable on paper and still short of cash to make payroll or buy materials for the next job, because too much of what you've earned is sitting in other people's bank accounts. If you're not sure where your cash floor actually sits, the break-even calculator is a useful sanity check.

A simple rule for who gets what terms

Track trailing average days-to-pay per customer, not per invoice. One late payment might be a fluke. A pattern is a pricing problem.

• Under 30 days average: standard terms, no change needed.
• Over 30 days average: pick one of three responses, or combine them:
  • Require a deposit up front, sized to cover materials float at minimum.
  • Add a terms premium of 3-5% to the quoted price for anyone on extended terms, effectively pricing in the carrying cost and chase time you now know it costs.
  • Keep a card on file and charge it automatically on the due date, removing the chase cost almost entirely.

None of these are punitive. A 3-5% premium on someone averaging 45 days is roughly what the maths above says it actually costs you to carry them. You're not penalising them, you're pricing the risk correctly instead of eating it silently.

What to actually do this week

Pull your last 10-15 invoices and note the payment date against the due date for each. Calculate average days late per customer. For anyone consistently over 30 days, have the deposit-or-terms-premium conversation before the next job starts, not after the next invoice goes unpaid. It's a five-minute conversation now, or another $150-$200 quietly gone from a job you thought was profitable.

None of this is legal advice on late payment interest or contract terms, those rules vary by state and by what's written into your original agreement. If you want to charge interest on overdue invoices or build penalty clauses into your terms, check what's enforceable with an accountant or a solicitor first.