How payment terms optimization can unlock business success


In today’s business environment, finance managers are expected to do more with less, from realizing greater cost savings and ensuring profitability, to streamlining business transactions in order to free up cash flow. Optimizing payment terms with your suppliers is one of the primary ways to ensure that your cash flow is managed effectively while also ensuring better supplier relationships.

In fact, the way a company manages its payment terms can significantly impact its financial health, customer relationships, and overall competitiveness. That’s why it’s essential that those responsible for negotiating terms are very cognizant of the role payment terms play in an organization’s success.

The benefits of payment terms optimization with your suppliers

Cash flow management: Understanding payment terms helps companies manage their cash flow effectively by setting the timeframe when payments will be disbursed. Net days (like net 30, for example) indicate that timeframe within which suppliers can expect to receive payment for their goods or services. By strategically structuring payment terms, both you and your suppliers can ensure a steady and predictable cash inflow. This knowledge is crucial for planning and ensuring that the business has enough funds to cover operational expenses. It also facilitates better resource planning and the ability to capitalize on growth opportunities.

Working capital management: You can optimize your working capital by strategically managing payment terms. Extending payment terms for payables while optimizing receivables can help strike a balance, minimizing the need for excessive working capital. Bottom line: Extending your days payables outstanding (DPO) is essential to realize the working capital needed to not only cover cash outflow, but also to allocate resources efficiently, enabling initiatives that could drive business expansion.

Negotiation and contractual agreements: Understanding payment terms is vital during contract negotiations. As noted above, extending your DPO results in your ability to make your working capital work for you for a longer period of time. However, suppliers want to negotiate favorable terms for themselves as well; terms that reduce their days sales outstanding (DSO) in alignment with their cash flow requirements and business model. Their desire for good relationships with their customers can see suppliers offering incentives like early payment discounts and dynamic discounting, resulting in a win-win for both sides. Clear and mutually agreed-upon payment terms are crucial for establishing a solid contractual agreement.

Risk management: Different payment terms carry varying levels of risk; properly structured payment terms significantly help mitigate that risk. By understanding and managing the financial stability of both your company and your suppliers, you can avoid disruptions in the supply chain, especially during times of economic volatility.

Relationship building: It’s important to remember that suppliers want to optimize their cash flow as much as you do, so negotiations have to be acceptable to both sides. Transparent communication regarding payment terms helps build trust and positive relationships between suppliers and buyers. It sets clear expectations and reduces the likelihood of misunderstandings or disputes related to payment.

Compliance and legal considerations: Adhering to financial regulations is crucial for any business. That goes for your suppliers as well, meaning it’s essential to do your due diligence when entering into a supplier relationship. Payment terms optimization ensures compliance with industry standards and legal requirements. This will help shield you (and your supplier) from potential legal challenges and financial penalties.

Cost of capital: The cost of financing and the supplier’s cost of capital are impacted by payment terms. Longer payment terms, while in your organization’s interest, may require suppliers to seek external financing, incurring additional costs. And with current interest rates still at high levels, this impacts working capital availability. Your supplier’s financial stability directly impacts your business as well. Good, reliable suppliers that can provide what you need may not be readily available, so optimizing payment terms to help both sides is vital.

How Corcentric can help

The balancing act where both you and your suppliers get what they need regarding payments can be precarious. You want to pay later…suppliers want to get paid sooner. Developing a partnership with a third-party provider can be the best answer to realizing true payment terms optimization. Corcentric works closely with Finance and Procurement to ensure that your suppliers get paid in the timeframe they need while providing you with a timeframe that works best for your organization. A combination of technology, advisory, and managed services provide both you and your suppliers with real-time visibility into the status of every invoice, giving both better management of both cash flow and working capital.