When AP Meets Common Sense: Discounting and Payment Terms (Part 1)

Editor’s note: this is a two-part series. Part 1 features observations and insights from Spend Matters’ Thomas Kase focused on AP, payment terms, strategic sourcing and discounting strategies. Part 2 provides recommendations for procurement and AP organizations around communicating payment strategies and policies to suppliers and the general public.

When I first came across “payment terms” outside of a classroom setting it was in Japan in the ‘90s. I must admit, from my vantage point in domestic (domestic Japanese, that is) sales engineering activities, I found it rather confusing.

As I recall (translated of course), the terms given to us, a Tier 1 supplier to a leading Japanese manufacturer, went along these lines: “50% of the amount owed will be paid in cash two months after the end of the month following the month the invoice is presented and the balance will be paid 3 months after that.” Try telling that to a typical payables clerk in the US to have them explain to suppliers.

These were pretty wild payment terms. I asked our finance team for what we typically saw in reality, and I learned that waiting six months to be paid was fairly typical. Of course for a country that at the time was headed toward gradual (and somewhat constant) deflation based on their monetary and economic policy, perhaps its not surprising that standard payment terms (and practices) would be so far off the charts.

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