Cash sales in the term used in accountancy, cash sales refers to those sales which are done in cash by the company implying that the company receives cash in return from its customers for the goods or services sold by the company to the customer. In the past cash, sales were more popular as companies prefer to do cash transactions but with technology and increased awareness about credit products credit sales have become more popular in comparison to cash transactions, however, many companies still prefer to do cash sales rather than credit sales. Let’s look at some of the advantages and disadvantages of cash sales –
Cash Sales Advantages
No Risk of Default
The first and foremost advantage of cash sales is that there is no risk of default because the consumer is paying instantly all the dues of the seller while purchasing the goods which is not the case with credit sales where the company runs this risk of non-payment from the consumer either intentionally or due to circumstances which in turn can impact the bottom line of the company as any default will mean that company won’t be earning anything from the sales of its products or services.
No Follow Up
In the case of credit sales once sales are done by the company then the company has to constantly follow up with debtors of the company and that follow-up requires time, manpower, and cost which in turn increases the overall cost associated with sales done by the company. In simple words, once the company has sold goods in cash then there is no additional cost or manpower required to do regular follow up which is the case when the company does business on credit terms.
Increased Working Capital
Working capital refers to that capital that is needed by the company on day to day basis so that its normal operations are not impacted but if the company has more credit sales then it results in working capital of the company getting tied up as people who have taken goods on credit will pay after 1 or 2 month which in turn results in increased working capital requirement and that is the reason why if the company does sales on a cash basis it can continue to operate with lesser working capital and hence can save a lot of interest which has to be given if additional capital is raised through borrowing.
Cash Sales Disadvantages
Decreased Turnover
The biggest disadvantage of cash sales is that not many people are willing to pay in cash for goods purchased due to liquidity problems and hence if company policy is such that it does not give credit to its customers then it can result in decreased turnover or sales for the company as customers will go to competitors of the company who are offering credit facility to the customers. In simple words, it is a trade-off between increased sales or doing cash sales and we all know that higher sales numbers are key if the company wants to remain in the business for a long period of time.
Lack of Relations with Customers
In the case of credit sales company develops long-lasting relations with customers because many customers do repeat transactions or business with the company due to continuous credit facilities given by the company to its regular customers but when it comes to cash sales there is no such scope as the business is done by the company purely on the cash basis and not based on relationships. In simple words, cash sales leave no scope of having any long-lasting relationships with customers which is the case with credit sales.
Not Suitable for All Products
Another drawback of cash sales is that it is not suitable for all the products as cash sales are idle for low priced products but when it comes to high priced products they require credit sales facility on the part of the company as not many customers afford to pay in cash for high priced products and hence cash sales are not idle for all types of business as well as products.
As one can see from the above that cash sales have pros as well as cons and that is the reason why any company thinking of adopting only cash sales model and avoiding credit sales all together should carefully read above points and then only should take any decision.