B2B Credit, Part III — Collections, Disputes and the Cash Conversion Cycle

Part III of a three-part series on B2B trade credit. [Part I](#/post/b2b-credit-part1-granting-terms) covered granting. [Part II](#/post/b2b-credit-part2-monitoring) covered monitoring. Part III covers collections and cash. Illustrative frameworks, not legal advice.

Collections is where trade credit stops being theory. It is also the function most companies staff with the fewest people, the least seniority and the worst tooling — then wonder why cash is tight.

The governing insight is unglamorous: most late payment is not distress, it is process. The invoice went to the wrong address, referenced no purchase order, sat unapproved on a manager's desk, or simply landed outside the buyer's fortnightly payment run. Chase all of that the way you would chase genuine credit stress and you burn goodwill on your best customers while the real risk goes unattended. Segmentation is everything.

Segment before you chase

A single dunning sequence applied to every overdue invoice is the sign of an immature function. Sort the book on two axes — value of exposure and reason for delay:

The economics justify the split: chasing a ₹40,000 invoice with three phone calls costs more than the margin on the order. Automate the tail; put humans on the exposure that moves the needle.

The dunning ladder

A documented escalation sequence, applied consistently, does most of the work:

• Pre-due (T−7). A courtesy reminder before the due date. This single step removes a large share of “I didn't know it was due” delay and is the cheapest intervention available.

• Due date. Automated confirmation of the amount and payment channel.

• T+7. First formal reminder, statement of account attached, direct request for a payment date — not a request for payment. Asking “when will this be paid?” and recording the answer creates a commitment you can hold them to.

• T+15. Telephone contact with the accounts-payable owner, and copy to the commercial contact. Establish whether it is process or distress; the answer determines everything downstream.

• T+30. Escalation to management on both sides. Credit hold on further despatches — the single most effective lever most firms hesitate to use. Interest on overdue amounts invoked per the terms accepted in the credit application.

• T+45–60. Formal demand letter, exposure frozen, security called upon (LC drawn, insurance claim notified, guarantee invoked). Under India's MSMED Act, a registered micro or small supplier has a statutory right to payment within 45 days and to compound interest at three times the RBI bank rate on delay — a materially stronger position than most suppliers realise they hold, and increasingly enforced through the Samadhaan portal and Facilitation Councils.

• T+90. Decision point: third-party agency, arbitration or legal action, IBC operational-creditor demand where thresholds are met, or negotiated settlement. Calculate the recovery economics honestly before choosing — a legal route that costs 30% and takes three years may be worse than a 25% settlement today, and the threat of the demand notice often collects more than the notice itself.

Two behavioural notes that outperform any software. First, always end a contact with an agreed date and a written confirmation; vague assurances are how accounts drift 90 days. Second, be the supplier who is politely relentless. Buyers with constrained cash pay the suppliers who follow up, in the order they follow up. Collection priority is, in practice, allocated by attention.

The dispute machine

Disputes deserve separate treatment because they are the largest silent source of late payment — and the most abused. A working dispute process needs: a single logging system (not the collector's inbox), a named owner outside finance for each dispute type — pricing to sales, quality to operations, delivery to logistics — a resolution SLA with escalation on breach, and root-cause reporting to management.

That last piece is what converts collections from firefighting into prevention. If 30% of your disputes are pricing mismatches between the order and the invoice, no amount of chasing fixes it — the order-to-invoice process does. Mature functions track “disputes as % of invoices raised” as a quality metric owned by the business, not the credit team.

And the discipline: the undisputed portion of an invoice is never on hold. A ₹2 lakh query on a ₹20 lakh invoice justifies withholding ₹2 lakh. Accepting the full withhold is a policy failure.

Where it lands: the cash conversion cycle

All of this exists to serve one number. The cash conversion cycle:

CCC = DIO + DSO − DPO

Days inventory outstanding, plus days sales outstanding, minus days payables outstanding. It is the number of days your own money is tied up funding the gap between paying suppliers and being paid by customers. Every day of CCC has to be financed — by your bank at your cost of funds, or by your equity at a higher one.

Which reframes the whole series. Terms granted in Part I set the floor under DSO. Monitoring in Part II tells you whether you are running above that floor. Collections in Part III closes the gap. And the working capital released is real, immediate and cheap: a firm with ₹50 crore of credit sales that cuts DSO from 75 to 60 days frees roughly ₹2 crore of cash permanently — no fundraising, no dilution, no interest. Run it on your own numbers in the working capital calculator.

There is a discipline beyond that, too. The temptation when cash is tight is to stretch DPO — pay your own suppliers later. It works, and it is exactly what your customers are doing to you. In an economy where MSME suppliers are the weakest link in every chain, the firms that pay on time earn priority, pricing and supply security that shows up nowhere in the CCC calculation but matters enormously when things get scarce.

The series in one paragraph

Grant credit deliberately, with terms earned rather than assumed and limits derived rather than guessed. Monitor with metrics that separate policy from performance — CEI and roll rates over headline DSO — and watch for the behavioural changes that precede every default. Collect in segments, with a documented ladder, a real dispute process and the willingness to use a credit hold. Do those three things and trade credit stops being a tax on growth and becomes what it should be: a commercial instrument you price, manage and get paid for.

References

AccountingTools, Quadient, Billtrust — CEI and AR performance measurement. Allianz Trade, CreditPulse — B2B collections and credit control practice. MSMED Act 2006 §§15–16 — 45-day payment obligation and compound interest at three times the RBI bank rate; MSME Samadhaan and Micro & Small Enterprise Facilitation Councils. Insolvency and Bankruptcy Code — operational creditor demand process. Standard working-capital literature on the cash conversion cycle.