How does selling products on credit affect cash flow?

Selling products on credit affects cash flow primarily by delaying cash inflows. When a company sells products on credit, it provides customers with the ability to purchase goods or services now and pay for them later. This means that while the company recognizes revenue at the time of the sale, the actual cash is not received immediately.

This delay can impact the company's liquidity since it may need to cover operational expenses and other financial obligations before receiving payment from customers. Therefore, although the revenue is booked as a sale, the expected cash inflow will occur at a later date, depending on the payment terms agreed upon with the customer. As a result, while selling on credit can increase sales volume and potentially benefit the overall revenue in the long term, it directly contributes to a delay in cash flow, which is crucial for short-term financial management.