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Procurement Payment Terms – part 1 – The Basics

by | April 11, 2019

Trying to keep your relationships with your suppliers can be a tricky situation, especially when we are referring to payment terms. Finding a supplier that offers good payment terms can take time.

As we live in an ever changing business environment, many procurement departments try to achieve cost savings from negotiating better payment terms with their suppliers. Whilst this can be very beneficial for your organisation, negotiating better payment terms can also help your suppliers and create a win-win situation for both parties.

Procurement payment terms – the basics

Usually, in an organisation the procurement department is responsible for negotiating, agreeing and setting certain payment terms and when working more closely with finance companies can see savings drastically improve.

The relationship with the suppliers is also very key when we are focusing on procurement payment terms. Engaging constantly and having an easy communication channel can go a long way.

Is your organisation getting the most of its payment terms?

Initially, before deciding to move forward with a supplier, payment terms need to be taken into consideration. Many industries are different and have distinctive rules or needs in terms of payment contracts. Also, where you do business can have a major impact on payment terms.

Optimising your procurement payment terms can make a big difference regarding overall cost savings.

Reviewing your payment terms on a regular basis can help to manage and have give a clear view over cash flow. But you have to constantly keep in mind that it takes time and resource to talk and negotiate with each supplier, it’s just not practical when you look at scale. Sometimes, a simple email or phone call can result in a supplier improving payment terms that can save you time and effort in further negotiation.

And lastly, it is important to keep on nurturing these relationships because once there is a disruption in the process it is hard to revise certain conditions. It is mandatory to prepare an escalation plan in case some suppliers will reject different changes on payment terms.

Tips for improving payment terms

There are opportunities for organisations to improve their payment terms practices such as:

  • Review your suppliers who are on immediate payment terms
  • Consider identifying appropriate suppliers spend and use discounted payment terms
  • Consider the standardisation of  the payment process
  • Improve payment on time

There are some tools you can use to optimise and improve payment terms in your organisation. Our procurement consultants created a spend management optimisation tool –  XoomTune  – which can help you gain more value from your overall source to pay solution and give you a better overview on how you are performing when it comes to payment terms.

In the second part of our blog series we will address how can you transform your procurement payment terms into opportunities!