Exploring Payment Terms and Working Capital Optimization: History and Context


Many outside of accounts payable and procurement fail to realize that most companies have not standardized their payment terms to suppliers. Or as my colleague David Gustin, of Trade Financing Matters, notes in his paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain, “For most large corporates, there are no standard payment terms. Their payment terms vary across divisions, jurisdictions and through acquisition. Over time, a large company may have more than 50 different terms.”

This proliferation of terms has become often low-hanging savings fruit for consultants that come in and look to identify opportunities, even inside more sophisticated accounts payable and procurement organizations. (But note: standardizing payment terms is often easier said than accomplished.)

David offers further context in his analysis:

“Since the 2008 financial crisis, many large corporates have developed working capital optimization programs. For their payables, this typically means extending payment terms if possible, attempting to standardize terms wherever possible and offering early payment terms to accelerate the flow of cash. However, there are two sides to the trade financing equation.”

These 2 sides, of course, are the buyer perspective – procurement, A/P, treasury – and the supplier perspective. Both groups have historically had different means of affecting early payment at varying degrees of cost, usually reflected in APR or percentage terms.

More recently, procurement and A/P organizations have become more insistent with new suppliers – it can be more of a challenge with incumbent suppliers from a mandatory perspective – to sign up for buyer-directed supplier networks and e-invoicing programs that can serve as an on-ramp to trade financing options.

But realizing the benefits of such programs, one must remember, always starts with an actual term itself, whether it is static or dynamic.

This post is based, in part, on content sourced from the Trade Financing Matters paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain. The research brief is a useful primer for those in procurement and A/P that want to understand the receivables financing, trade financing and working capital management landscape – and all the different options available to them.

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