Net 30

Net 30 is a common Trade Credit term you'll see on business invoices. In plain English, it means the buyer has 30 calendar days from the invoice date to pay the seller the full, or “net,” amount owed. Think of it as a short-term, interest-free loan that businesses extend to each other. This practice is the lifeblood of commerce, allowing companies to receive goods or services now and pay for them later, smoothing out their operations. For a value investor, however, these simple payment terms are more than just a logistical detail; they are a window into a company’s operational efficiency, its relationship with suppliers and customers, and its competitive strength. Understanding how a company manages its payables and receivables can reveal hidden strengths or signal brewing trouble long before it hits the headlines.

How a company uses terms like Net 30—both when it's selling and when it's buying—tells a fascinating story. It’s a tug-of-war for cash, and who wins reveals who has the power.

When a company sells a product and offers Net 30 terms, it's great for attracting customers but creates a delay in receiving cash. This unpaid bill is logged on the balance sheet as Accounts Receivable. While necessary, a large and growing pile of receivables can be a red flag.

• The Risk: The company is effectively funding its customers' operations. This ties up cash that could be used for growth, paying down debt, or returning to shareholders. Worse, some customers might pay late or not at all, leading to write-offs.
• What to Watch: Keep an eye on Days Sales Outstanding (DSO). This metric tells you the average number of days it takes for a company to collect payment after a sale. A low and stable DSO is a sign of an efficient business with disciplined customers. A rapidly increasing DSO might suggest the company is struggling to collect its dues or is offering generous terms to desperate buyers just to make a sale.

Now, let's flip the script. When a company buys raw materials or services on Net 30 terms, it's a huge advantage. It gets to hold onto its cash for an extra 30 days, using the supplier's money to run its business. This is a classic example of optimizing Working Capital. The amount owed to suppliers is recorded as Accounts Payable.

• The Benefit: This is essentially a free loan. The longer a company can delay payment (without harming its reputation), the better its Cash Flow. It can use that cash to fund day-to-day operations, reducing the need for expensive bank loans.
• What to Watch: Here, you'll want to look at Days Payable Outstanding (DPO). This metric shows the average number of days a company takes to pay its own bills. A high DPO often signals that the company has significant bargaining power over its suppliers. It's so important to its suppliers' business that they have no choice but to accept longer payment terms.

For a value investor, the magic happens when you compare a company's DSO and DPO. The ideal scenario is a business that collects cash from customers quickly (low DSO) and pays its suppliers slowly (high DPO). This powerful combination is a key component of the Cash Conversion Cycle (CCC), which measures how long it takes for a company to convert its investments in inventory and other resources into cash. A low or even negative CCC is the hallmark of an extraordinarily efficient business. Think of a dominant retailer like Amazon or a consumer goods giant. They sell products to you and get your cash almost instantly. Then, they might take 30, 60, or even 90 days to pay the suppliers who provided those products. They are using their suppliers' cash to fund their growth. This is a powerful competitive advantage—a deep economic Moat—that is hard for smaller competitors to replicate.

You might also see variations like “2/10, net 30.” This is a sweet deal offered by sellers to get their cash even faster. It means the buyer can take a 2% discount if they pay the invoice within 10 days; otherwise, the full amount is due in 30 days. While a 2% discount might sound small, it's usually a fantastic deal for the buyer. Forgoing the discount to pay 20 days later (the difference between day 30 and day 10) is equivalent to taking a loan with an annualized interest rate of over 36%! (Calculation: (365 / 20 days) x 2%). Financially savvy companies with access to cash will almost always take the discount. A company that consistently forgoes these attractive discounts may be facing a cash crunch.