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Payment to payment realization the difference and effect
Both the words sound the same but there is huge difference between the two and also the impact that they bring can easily make a business grow and shutdown.
Lets understand the difference between both words by examples this suits more to manufacturing industry as the gap between payment to payment realization is good enough to take a manufacturing unit in spin from where the recovery happening is very rare.
A manufacturing unit which manufactures product organic sugar or palm sugar lets find the difference of the above two words.
A manufacturing unit cannot distribute by itself as the constraints of funds on marketing and appointing distributors is bit difficult to handle so keeping these things a manufacturing unit produces 20 kg of palm sugar and hands it over to the distributor.
So technically saying the cost of 20 kg of palm sugar should have been paid to the manufacturing unit, in reality it does not happen like this the distributor takes the goods worth 20 kg of palm sugar and places in the retail stores where the distributor has taken shelf space.
The distributor also does not get the amount from retail shop, who agrees on bill to bill or credit period for payment of sellable sugar and non sellable sugar needs to be replenished if its near the expiry date.
The manufacturing unit will be happy as it has sold 20kg of sugar but in reality money or the payment is not realized its just in the books of the manufacturing unit that there sales have happened.
By the time the retailer makes payment and the distributor makes payment to manufacturing unit, the manufacturing unit has to continue producing in spite of having got sales but not payment realization.
If manufacturing unit does not have adequate capital and inventory to continue production till payment is realized, if the unit does not have capital or inventory by the time it survives 90 days or 120 days of credit period the amount of receivables becomes too big.
This cycle when gets stuck is good enough to bring down a manufacturing unit. Hence the unit should always plan to have adequate capital for the survival period and also has to have policy while expanding to ensure the minimum payment realization needs to happen at regular intervals