Accounting Ver17. “Profitable on Paper, Yet Short on Cash ― How Japan and the West Think Differently About Payment Terms”
Oct 10, 2026
Thank you for reading.
Today, I would like to discuss the differences in payment culture between Japan and Western countries, and why those differences can have a significant impact on corporate cash flow.
■ Introduction
Sales and profits are important indicators of business performance.
However, what truly keeps a company alive is not profit, but it is cash.
No matter how profitable a company appears on paper, it cannot survive if it does not have sufficient cash available to meet its financial obligations.
Throughout my career working with manufacturers, equipment suppliers, and engineering companies in both Japan and overseas markets, I have repeatedly observed substantial differences in how payments are viewed and managed.
In my opinion, these differences are one of the key reasons why many Japanese companies struggle with cash flow despite reporting healthy profits.
■ In Western Countries, Risk Is Shared
For large capital equipment projects, Western companies generally adopt milestone-based payment structures.
For example, equipment payments are often divided as follows:
10-30% upon order placement
30% upon completion of machine assembly (typically around FAT)
30-40% upon shipment
0-10% upon final customer acceptance
Installation and commissioning work is often billed separately and may also be divided into multiple milestones, such as:
Contract award
Start of installation
Project progress milestones
Final acceptance
While the final customer acceptance stage often represents the largest portion of the installation payment, it is common for this amount to account for only 30-40% of the total installation contract value.
As a result, suppliers are able to recover a substantial portion of their costs throughout the project lifecycle rather than waiting until completion.
In other words, Western business practices are generally based on the idea that both the customer and supplier should share project risk and financial burden.
■ In Japan, Suppliers Often Finance the Project
In contrast, payment terms in Japan can sometimes look like this:
0% upon order placement
0% progress payment
0% upon shipment
100% after customer acceptance
Under such conditions, equipment manufacturers must fund:
Engineering costs
Material purchases
Subcontractor costs
Labor expenses
Logistics costs
Installation expenses
Commissioning expenses
entirely from their own resources until the project is completed.
For large projects, it is not unusual for six months to a year, or even longer, to pass between order receipt and final acceptance.
During that period, suppliers are effectively financing the project on behalf of their customers.
■ The Same Difference Exists in Aftermarket Parts
These differences are not limited to capital equipment projects.
They also exist in aftermarket parts and maintenance businesses.
In many Western countries, standard practice is:
Invoice issued upon shipment
Cash payment within 30 days of the invoice date
Some companies even require:
100% advance payment before shipment
Advance payment for new customers
In Japan, however, it is common to see:
Invoice issued upon shipment
End-of-month closing
Payment at the end of the following month
For example:
Shipment: June 1
Month-end closing: June 30
Payment: July 31
This effectively creates a 61-day payment cycle.
From a Western perspective, a receivable that would normally be collected within 30 days may require almost twice as long to convert into cash.
■ Digitalization Has Not Changed the Fundamentals
Paper promissory notes have become less common in recent years.
However, they have largely been replaced by:
Electronic promissory notes
Densai (electronically recorded monetary claims)
While this digitalization has improved administrative efficiency, the fundamental nature of the transaction has not changed.
These instruments still represent future payment obligations.
In some cases, payment terms extend to:
120 days
150 days
As a result, revenue may be recognized today while the actual cash will not arrive for several months.
■ Early Cash Conversion Does Not Eliminate Risk
It is often said that:
"Densai can be discounted."
"Factoring can immediately turn receivables into cash."
Although these tools can help improve cash flow, management should understand how they actually work.
In the case of bill discounting or recourse factoring, the company is essentially selling future receivables to a financial institution in exchange for immediate cash.
If the issuer becomes insolvent before maturity, the company that discounted the receivable may still be required to bear the financial burden.
Therefore, cash received through discounting does not necessarily mean the underlying credit risk has disappeared.
Management should not focus solely on whether cash has been received.
It is equally important to understand the credit risk supporting that cash.
■ Profitable on Paper, But Cash-Flow Negative
These business practices sometimes create a unique situation in Japan:
Sales are increasing.
Profits are growing.
Order backlogs are strong.
Yet cash flow continues to deteriorate.
The reason is simple.
The timing of profit recognition and cash collection is different.
For example:
The equipment is delivered.
Customer acceptance is completed.
Revenue is recognized.
But cash has not yet been received.
In such a situation, the company may appear profitable according to its financial statements while simultaneously suffering from negative cash flow.
This is one of the major reasons why so-called "black-ink bankruptcies" or profitable bankruptcies occur.
■ Why Japan Is Moving Away from Long-Term Bills
In recent years, the Japanese government and the Japan Fair Trade Commission have encouraged businesses to reduce excessive payment terms and phase out long-term promissory notes.
The rationale is straightforward:
Customers may be transferring financing costs that should be borne by themselves onto their suppliers.
Many small and medium-sized enterprises have historically faced situations where they must:
Pay for materials
Pay employee salaries
Pay subcontractors
Wait months to collect receivables
Pay corporate taxes on accounting profits before cash is received
As a result, more companies are now transitioning toward:
Shorter payment terms
Cash settlements
Reduced dependence on promissory notes
■ A Positive Change for the Japanese Economy
I strongly support this trend.
In fact, I believe improving payment practices could have a greater positive impact on the Japanese economy than simply reducing corporate tax rates.
When suppliers receive cash more quickly, they can:
Reduce dependence on bank borrowing
Invest in new equipment
Develop their workforce
Increase R&D spending
Pursue new business opportunities
In other words, payment reform is not merely an accounting issue.
It is a structural improvement that can strengthen supply chains and improve the competitiveness of Japan's entire industrial sector.
■ Conclusion
Accounting systems are not merely tools for calculating profits.
The key question is:
When does profit become cash?
Revenue → Accounts Receivable → Promissory Notes / Electronic Receivables → Cash
Only by managing this entire process can a company achieve sustainable growth.
My experience working with both Japanese and Western companies has repeatedly highlighted just how unique Japan's payment culture is.
Ultimately, successful management is not about maximizing accounting profits alone. It is about generating cash.
Profit is an opinion.
Cash is a fact.
Keeping a constant eye on this fact is one of the most important responsibilities of management.
■ Support
If you would like to better understand Japanese payment practices, Densai, electronic receivables, or their impact on cash flow, please feel to reach out.
Contact: info@metricjapan.com
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