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Procurement payment terms – part 2 – Opportunities

by | April 24, 2019

In part 1 of this blog series we talked about procurement payment terms as a general approach. In the second part of the series we will delve a bit deeper into how optimising your procurement payment terms can significantly improve your overall cost savings.

These are the areas to focus on in order to take advantage from your payment terms:

  1. Improving cash-flow
  2. Standardising Payment Processes
  3. Reducing risk from late payment charges
  4. Using discounted payment terms

Improving cash-flow

  • acknowledge and understand customer payment cycles
    • customers will usually have different payment dates and by incorporating that type of information into your payment system you will help your organisation to have a much better view into your cash flow activities
  • try to get the best deals
    • asking for multiple offers from different suppliers is very important in order to get the best deals, but quality should also be a major factor
  • negotiate payment terms with current customers
    • sometimes suppliers are willing to offer discounts for early payment
  • use data and analytics in decision making
    • tracking data will help your organisation to have a better view over cash flow

Standardisation of your payment process

In almost every industry standardisation is something to be desired. Some of the benefits standardisation brings are improving clarity, guaranteeing quality, promotes productivity, boosts employee morale, improves customer service.

Try setting up your accounting systems so that only a few responsible people can have access to manage or change payments terms. Make sure your suppliers are on track for their agreed payment term conditions.

Reducing the risk of late payment

There is this fundamental problem in financial supply chain – suppliers want to get paid as early as possible, while buyers want to pay as late as possible. This is the age-old conundrum that organisations face, creating friction around payment terms. Small and mid-sized business suppliers are waiting longer and longer to be paid after delivering goods. This trend has a big impact on operations because cash flow is one of the biggest concerns facing small and mid-sized businesses.

Early discounted payment terms

Organisations often take advantage from getting paid earlier. As a supplier and also as a customer. Offering certain discounts or rewards to the suppliers who pay earlier can go a long way. But you also have to keep in mind if it makes financial sense to your organisation to offer them early discounted payment terms. You have to take into consideration your return on investment, cost of financing and cash flow.

In today’s challenging economy organisations need to find creative ways to maximise savings, a start can be simply reviewing your payment terms. In this article we included some other ideas such as: offering discounts for early payment and the standardisation of your payment processes, both of which can help both parties and creates win-win situations.

Our procurement consultants created an spend opportunity assessment tool that can help you achieve a better understanding on how you are performing when it comes to payment terms.