B2B credit and cash flow for Indian distributors: credit limits, ageing and DSO

Udhaar is working capital you have lent out

Every rupee sitting in an unpaid invoice is a rupee you cannot use to buy stock, pay salaries or take a bulk-purchase discount from your own supplier. For a distributor with thin margins, a few slow-paying retailers can turn a profitable month into a cash crunch.

The fix is not to stop giving credit. In most trades, udhaar is how you win and keep customers. The fix is to manage credit deliberately: decide who gets how much, watch how old your receivables are, measure the trend, and follow up on a routine rather than when you suddenly need cash.

Set credit periods and limits per buyer

Every buyer should have two numbers written down:

1. Credit period: how many days after delivery payment is due, for example 15, 30 or 45 days.
2. Credit limit: the maximum outstanding amount in rupees you are willing to carry for that buyer at any time.

The credit period controls when you get paid; the limit controls how much you risk. A buyer with a 30-day period and a ₹2,00,000 limit cannot keep ordering once their unpaid invoices reach ₹2,00,000, even if none is overdue yet.

A simple way to set them:

These are starting points, not rules. Review every buyer once a quarter. Raise limits for buyers who pay on time, and lower them for buyers whose invoices keep slipping into older buckets.

Check before you extend credit

A few minutes of checking can save months of chasing:

• GSTIN: verify the buyer's GSTIN on the GST portal and confirm the legal name matches your invoice. A cancelled or mismatched GSTIN is a red flag, and it also matters for the buyer's input tax credit.
• Udyam details: if the buyer says they are an MSME, their Udyam registration helps you understand their size. If you are a micro or small manufacturer or service provider, make sure your own Udyam registration is current and printed on your invoices, and register before you sell: whether a later registration covers earlier supplies is unsettled while a larger Supreme Court bench considers it (NBCC v. State of West Bengal, 10 January 2025).
• Trade references: ask one or two other suppliers how the buyer pays.
• Address and contacts: record who places orders and who actually releases payments. They are often different people.

Invoice discipline

Late invoices get paid late. A clean routine:

• Raise the invoice the same day goods are dispatched.
• Show the due date clearly, not just the invoice date.
• Attach a UPI payment link or QR code and your bank details.
• Share it on WhatsApp or email immediately, and keep proof of delivery.
• Keep a running ledger, your khata, for each buyer, and send a statement of account monthly.

Overdue ageing buckets

Overdue ageing sorts your unpaid invoices by how many days they are past due. It shows at a glance where your money is stuck. Here is an example for a distributor with ₹18,00,000 in receivables:

Old debts also run into a legal deadline: recovery claims generally have to be filed within three years under the Limitation Act. A written acknowledgment of the balance signed by the buyer, or a part-payment, made before that deadline starts a fresh three-year period, so collect signed balance confirmations from slow payers.

The older an invoice gets, the harder it becomes to collect, so attention should go to the 31-60 and 61-90 buckets before they roll into 90+. Try the calculator below with your own figures.

You can also use the full overdue ageing calculator.

DSO: how long you wait to get paid

DSO, or days sales outstanding, tells you how many days on average it takes to collect a rupee of credit sales.

DSO = (Trade receivables at period end ÷ Credit sales in the period) × Number of days in the period

Worked example

Suppose that over the last quarter (90 days):

• Credit sales were ₹45,00,000.
• Receivables at the end of the quarter were ₹18,00,000.

DSO = (18,00,000 ÷ 45,00,000) × 90 = 0.4 × 90 = 36 days.

If your standard credit period is 30 days, buyers are paying about 6 days late on average. Now see what that means in rupees. Your average daily credit sales are ₹45,00,000 ÷ 90 = ₹50,000. If you brought DSO down from 36 to 30 days, you would free up 6 × ₹50,000 = ₹3,00,000 of cash, without selling a single extra unit.

Track DSO every month on the same basis. The trend matters more than any single number. Our article on reducing DSO for distributors has more tactics.

A weekly collections routine

Collections work best as a habit, not a crisis response. Block one fixed slot each week, say Monday morning:

1. Update the ageing report

   Record all payments received, then refresh the ageing buckets.

2. Check promises due this week

   List every promise-to-pay date falling this week and send a polite reminder on each date.

3. Send reminders for new overdues

   Every invoice that crossed its due date since last week gets a friendly WhatsApp reminder with the invoice and a payment link.

4. Call the 31-60 day accounts

   Speak to the person who releases payments and agree a specific date.

5. Decide on the 60+ accounts

   Choose the next step for each: settlement offer, demand letter, credit hold or legal advice.

Keep all contact between 08:00 and 19:00, a window modelled on RBI's rule for lenders' recovery agents (RBI circular dated 12 August 2022), which does not bind private suppliers but is good practice. Stay polite, and never threaten or shame a buyer. The full escalation process is in our complete guide to recovering overdue payments.

Early-payment discount maths

A common offer is "2/10 net 30": 2% off if paid within 10 days, otherwise the full amount in 30 days. It sounds small, but look at the cost.

On a ₹1,00,000 invoice, the buyer pays ₹98,000 on day 10 instead of ₹1,00,000 on day 30. You give up ₹2,000 to get ₹98,000 twenty days early.

• Cost for 20 days: 2,000 ÷ 98,000 = about 2.04%.
• Annualised: 2.04% × (365 ÷ 20) = about 37% a year.

Compare that with your own cost of funds. If your overdraft costs, say, 12% a year, borrowing ₹98,000 for 20 days costs roughly ₹644 in interest, far less than the ₹2,000 discount. A discount makes sense only when you urgently need cash and cannot borrow cheaply, or when it reliably converts a habitually late buyer into an early one. Often a smaller discount, or simply a firm reminder routine, is the better deal.

When to stop supplying

Stopping supply is a business decision, not a punishment. Decide your rule in advance and apply it to every buyer equally, for example:

• Pause credit orders when any invoice is more than 60 days past due.
• Pause when total outstanding exceeds the credit limit.
• Move to advance or cash-on-delivery when a buyer breaks two promise-to-pay dates in a row.

Tell the buyer politely and in writing, explain what will restore normal terms, and resume once the account is back within limits. A clear, consistent rule protects your cash while keeping the door open.

If you want help running reminders and follow-ups on overdue invoices, Udhaar Wapas handles the polite escalation for each case so you can focus on selling. See how it works for distributors.