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The $100 Million Question for Your Treasury Group: Part II

Last week, we began to explore the impact of payment terms management and early payment discounts on cash earnings, cost savings, and working capital. In this post, we’ll resume the payment terms discussion and assess the impact on working capital.

In addition to expanding early payment discount opportunities, top performing organizations are also freeing up working capital by paying closer attention to the payment terms in their ERP or payables systems, or have savvy consultants do that for them. For many companies, these terms aren’t closely managed. They often result from ad hoc negotiations on a supplier-by-supplier basis rather than from a carefully defined strategy. Without closer scrutiny, the number of distinct payment terms can grow to 100 or more. In many instances, payment policies contribute to DPO metrics that are below an industry average.

Consolidating on a few, standard payment terms in line with your industry and tailoring these terms by supplier group, commodity type, region, or time of year can have a dramatic impact on the expansion of early payment discounts, and management of working capital. Having reliable data for analysis is critical to success. This is another area where a business network can play a key role—providing transactional data that can be used for both early payment discount programs and payment terms strategy development.

The working capital impact of a terms extension program is about $2.7 million for every $1 billion per day of DPO improvement, and that’s on top of the early payment discount savings—generated by 20 to 25 percent of targeted suppliers for top performers. The net result is this. You help many suppliers get paid sooner and get the best of both worlds: more early payment discounts coupled with the ability to free up working capital.

For an organization with $4 billion of spend and 4-day DPO extension across 60 percent of that spend, that’s nearly $26 million in freed-up working capital. Extend DPO by 15 days, going from 30- to 45-day standard terms and, well, you do the math. While these scenarios may not directly apply to your organization, what should be apparent is the magnitude of opportunity from combining early payment discounts and payment terms standardization.

What are you waiting for? That could be a $100 million question for your treasury group.


About the author
Chris Rauen
Chris Rauen

Chris is responsible for marketing programs at Ariba that educate finance, procurement, supply chain, and other business professionals on the transformational potential of the Ariba Network and Ariba Financial solutions. Before joining Ariba, Chri... Read More >>>

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