There are five major costs associated with accounts receivable. They are: bad debts, interest cost, opportunity costs, administrative costs, and miscellaneous costs. Each cost category is described below:

Bad Debts:
Every sale on open account terms carries with it a risk of non-payment. Non- payment may be the result of a legitimate dispute. Non payment of larger amounts is often the result of a customer filing for bankruptcy protection.

Interest:
What does it cost to carry past-due accounts? If a 5% net profit is realized on sales, for every $100 accepted in credit, $95 is paid for product, expenses, taxes, and so on. Interest alone can erase the $5 profit in a short period of time:

Interest Costs at 12% Per Year:
First month: 12% x $100 = $12.00 (divided by 12 months = $1.00)

Opportunity Costs (e.g., Alternate Use of Capital):
Consider an example using a yearly sales figure of $12,000,000 or $33,000 per day. If the accounts receivable investment improved and the number of DSO decreased, the following amounts could be released or added to cash flow: by three days - $100,000; by six days - $200,000; by thirty days - $1,000,000. The funds could be used for keeping up with competition (for example, expansion or new product development) or internal improvements (such as salary and overhead increases).

Miscellaneous Costs:
Losing the ability to discount (a crucial cost, especially in a high-interest period); paying penalty/late charges (in addition to the possibility of restricted credit); increased risk factors (the older the debt, the harder to collect); maintaining administrative, bookkeeping functions; letters of credit fees.