There are two anti-signals when it comes to businesses.

One is high CAC and the other is high credit sales.

Both of them highlight the same symptom: there is just not enough demand in the market for your product.

High CAC results from having to convince the customer a lot to try your product or services, and high credit sales or too generous credit terms indicate that there is no shortage of your goods. People don’t have to snatch it out of your hands, so they know they can get better terms.

And you also have to offer them better terms so that they can try it. If not from the utility perspective, then at least from the cash flow perspective, that they can reduce their own cash conversion cycle by paying their creditors late and less.

Imagine a platonic business, the ideal. There, the customer will come to you on his own. You did not spend anything to bring it to your door.

You know that the demand for your product is so high that if this guy does not buy it, someone else will buy it. And that creates competition amongst the buyers. They try to outbid and out-maneuver each other.

Instead of credit sale, if the product is really hot, you would rather pay in cash. If the cash scene is too hot, then I’ll pay you more cash as long as you can have your hands on product.

The further you are away from this ideal, the worse your CAC and credit side of business is.

And purely from a finance side of things, if someone is buying your product for an annual subscription or something like that, they’re essentially lending you money for the period where the services are not used yet. So that is a good sign also.

A high number of short-term subscriptions over long-term subscriptions is an anti-signal.

So a quick way to evaluate a business is to see how pushy they have to be on the credit side of things, how high their CAC is, and what the subscription situation is, if any.

And of course, these two tools have their own place. At start, you are going to have high CAC until you stabilize your position in the market, and then CAC plummets or how credit sales can encourage more turnover.

Both tools have their own place, but when you overextend the lever, can you really turn it back?

If yes, excellent. If no, then there might be some trouble.

This can be a neat little trick while you’re investing in some business. Look at the cash conversion cycle, look at the CAC, look at the pressure from credit sales. It will give you a good enough picture of business health.