The True Cost of Delayed Supplier Payments

State of Flux  (a global procurement consultancy and SRM software company) carried out a survey to calculate the real cost of late payments practices to suppliers. Alan Day, founder and chairman, reports on the results.

We've seen many high-profile organisations in the press recently regarding treatment of suppliers, namely the common practice of extending suppliers' payment terms. These are large organisations such as Unilever, Heineken, Diageo, Tesco and P&G. We were curious to know whether this practice actually pays off - so we did the maths.

On the one hand, extending payment terms is understandable. It represents a flexible source of credit, reflective of the value of business with a supplier. It is also potentially a low-cost source of credit as suppliers tend not to charge interest on the amount outstanding for fear of damaging the relationship (often despite contractual or even regulatory/legal rights to do so).

The unilateral move of organisations towards delaying payments often gives the supplier little choice, especially given the balance of power in the relationship. It also ignores that the supplier’s pricing is the result of an earlier negotiation and agreement of payment terms.

The value of being a customer of choice

Our seven years of global supplier relationship management (SRM) research across over 1,200 organisations has shown organisations that are good at SRM achieve on average 4% to 6% annual post-contractual benefit (that is 4% to 6% over the agreed contractual terms) from their strategic suppliers. And if they are considered a customer of choice[1] by these suppliers they are twice as likely to receive other benefits such as access to the supplier’s A team, access to scarce resource in times of need and preferential pricing. They are also four times as likely to receive access to new innovation.

Our research over the years has found that there are three main reasons why suppliers’ regard an organisation as a customer of choice:

  1. Money – it is a large source of revenue or profit
  2. Brand – or organisational alignment
  3. Behavioural aspects – they are easy to work with, they listen, they make the supplier feel valued

By unilaterally changing payment terms we are affecting at least two of the attributes that give  a customer of choice advantage. But let’s look closer at the money aspect.

As an employee, it is often said that money is not a motivator, but if you get it wrong it can be a big de-motivator. Herzberg[2] said money is a 'hygiene' need and true motivators are more intrinsic like:

  • Achievement
  • Being listened to
  • Recognition
  • Type or quality of work
  • Responsibility / trust

Why should it be any different for suppliers’? We ask them (often contractually) to do a good job and promise to pay them for doing it. They expect to get paid, just as you would expect to get paid as an employee. So by delaying payments or shifting terms it is de-motivating suppliers, which will directly affect an organisation’s status as a customer of choice and the benefits and advantage this could provide.

The financial benefit of delayed payment

To demonstrate the financial benefits of extending payment terms, let’s take an example of Jackson Steinem & Co., a fictional organisation that is paying its supplier £1.2 million per annum. For the ease of our example, Jackson Steinem & Co.’s supplier payments are broken into 12 monthly payments of £100,000 each. The payment terms are 30 days and Jackson Steinem & Co.’s cost of capital is 5%.

Jackson Steinem & Co. decides to change its supplier payment terms from 30 to 60 days – and despite its £1.2 million annual spend with the supplier, it saves only £417.

For those interested, here’s the maths:

The formula to calculate the savings from delaying payment is as follows:


Jackson Steinem & Co. avoids the cost of capital for 30 days, which results in a saving of

(((60 days minus 30 days = 30 days) divided by (30 days x 12 payments per year)) times the cost of capital, 5%) times the monthly amount, £100,000 = £417.

Or for the more mathematical of you: (((60-30)/(30x12)*0.05)*£100,000) = £417.

Remember the saving is on the cost of capital for the payment days of the amount, NOT cost of capital for the payment amount.

A common mistake is thinking that extending payment terms produces a saving of 5% of £100,000 (i.e. £5,000), because you are changing the payment terms which affect each month’s payment. Like Jackson Steinem & Co., the large majority of organisational spend is not one-off but regular ongoing monthly payments over the life of the contract (typically years).

In this case Jackson Steinem & Co, hasn’t changed the frequency of the payments, nor the amount owed. They are still paid monthly, however, there is one month when a payment is delayed, but it still must be paid.

The customer of choice benefit

As mentioned, our research has shown that good SRM drives on average between 4% to 6% per annum benefit, so for ease of comparison let’s say 5%. For Jackson Steinem & Co., this equates to an annual saving of 5% of £1.2 million, or £60,000.

Compare the £417 saving from extending payment terms to the £60,000 that Jackson Steinem & Co. could have saved through implementing SRM with its supplier. It’s clear to see which is more beneficial financially for Jackson Steinem & Co., not to mention the customer of choice benefits that they would attract by being better to work with.

So delaying suppliers’ payments doesn’t pay, but implementing SRM in does.

[1] A ‘customer of choice’ is a company that, through its practices and behaviours, consistently positions itself to receive preferential access to resources, ideas and innovations from its key suppliers that give it a competitive advantage.

[2] Frederick Herzberg 'The Motivation to Work'

Alan can be reached at or +44 207 8420600 and you can download the survery here

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Voices (9)

  1. JD:

    Hi! thanks for the article. It clearly highlights how to best assess savings realized based on changing the payment terms to suppliers.
    I am not very clear about the Cost Of Capital though: wouldnt it then be better for the Treasury Dpt to use a higher CoC? (say 25% instead of 5%) as the savings would be even higher?

    1. Alan Day:

      Hi JD

      We used 5% in the example above with the fictitious organization Jackson Steinem & Co. but typically your treasury department would have set your organizations cost of capital so use that.

      If you increase cost of capital to 25% (which wouldn’t be the case in today’s environment of low interest rates) then it does change the number but not enough to make any material difference.

      For example:
      (((60 days minus 30 days = 30 days) divided by (30 days x 12 payments per year)) times the cost of capital, 25%) times the monthly amount, £100,000 = £2,083

      Compare this to the £60,000 saved through good SRM and it still doesn’t make sense to mess about delaying supplier payments.

      Not to mention all the ‘customer of choice’ benefits like access to scarce resources and the suppliers ‘A’ team that are critical in a Covid-19 world.

      Hope this provides some more clarity but feel free to contact me directly if you’d like to discuss.

      Kind regards


  2. Arthur Lee:

    Nice article. However, i am trying to think from another angle using your example.

    If i can delay payment, i can keep $100,000 and invest for 1 month, then take out and pay the supplier. Under this practice, i should get $100,000 x 5% / 12 = $417 per month.

    This is going to be repeated every month, so i should get $417 x 12 = $5,004 per year. That means an annual saving of $5,004.

    1. Pär Gester:

      Gambling with your supplier’s money is a least immoral, under certain circumstances illegal.

      1. Peter Thrane:

        its not the suppliers money untill due date. your talk of immoral or any type of illegaly is not relevant at best.
        that said, I find the article to be on point and relevant for many organizations.
        the only reason to extend payment terms must be to do as Mr. Lee mentions alternative investments (internal or external).

    2. Alan Day:

      Thanks Arthur

      It’s a good point and we didn’t cover what the organization does with the cash that has been made available for the month in the article.

      Your example is completely plausible or an organization will simply use it to pay other invoices and avoid any late payment fees.

      Either way, the numbers generated from this use of cash still pale into significance when looked at what can be achieved through better SRM. ($5,004 versus $60,000).

      Happy to discuss further, please feel free to contact me directly.

      Kind regards


  3. Pär Gester:

    Great article, this is what I try to explain to my customers. Engineers understand accountant don’t.

  4. KBC:

    Terrific look at payment terms and the real impact to the bottom line.

  5. Tim Norton:

    Nice article. Could not agree more. ‘The Relationship’ value is not easy measure, but there is no question in my mind that a better relationship pays off significantly more than transactional actions like delayed pay terms. Scope creep, speed and quality of attaining resources, future pricing, are all benefits of a better relationship just to name a few. Clear benefits on both sides. Great perspective in this article with hard data to back it up. Well done.

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