Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Cut Costs with Supplier Payment Terms
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- Lucas: So there's a classic procurement move that sounds almost too simple, but it's quietly one of the most effective ways to cut costs without touching the unit price. I'm talking about renegotiating payment terms. Luna: You mean just asking your suppliers to wait longer for their money? That's a thing? Lucas: It absolutely is. And it's a thing that a mid-sized manufacturer I was looking at recently used to free up nearly two million dollars in working capital over a year. Just by shifting their standard payment terms from net thirty to net sixty with about a third of their suppliers. Luna: Two million is a big number. But how do you get a supplier to agree to that without them just raising prices to compensate? Lucas: That's the real question, right? The naive approach is to just send a letter saying 'we're now paying in sixty days' and hope for the best. But that's how you burn relationships. The manufacturer I'm thinking of did something smarter. Lucas: They went to their top suppliers, the ones they had the most leverage with, and offered something in exchange. In some cases it was a commitment to a higher annual volume. In others, it was a longer-term contract, or even help with financing through a supply chain finance program. Luna: So it's not just a power play. It's a trade. They're buying the extended terms with something the supplier actually values. Lucas: Exactly. And that's the key. The supplier is essentially giving you an interest-free loan for the extra thirty days. So you have to make it worth their while. Otherwise they'll just build the cost into their pricing and you've gained nothing. Luna: So what's the typical saving look like? I mean, if you're paying a supplier a million dollars a year, how much does pushing from thirty to sixty days actually save you? Lucas: Well, it depends on your cost of capital. If your company's cost of capital is, say, eight percent, then for every million dollars in annual spend, extending terms by thirty days saves you roughly the interest on that money for a month. That's about sixty-six hundred dollars. Not huge per supplier, but if you do it across many suppliers, it adds up. Lucas: And in the case I mentioned, they had about thirty million in spend from that third of suppliers, so the math got them to that two million figure pretty quickly. Plus, they were able to use that freed-up cash to fund some capital improvements without taking on new debt. Luna: So it's not just about cutting costs, it's also about improving liquidity. That's a double win for the finance side. Lucas: Right. And the CFO definitely noticed. But there's a risk here, too. If you push terms too far, you might strain a supplier that's already cash-strapped. You could end up with quality issues or even supply disruptions. So it's a balancing act. Luna: Have you seen cases where it backfired? Where a buyer tried to extend terms and it blew up? Lucas: I've heard of a few. There was a story a few years back about a large retailer that unilaterally extended payment terms for its suppliers from thirty to ninety days. A bunch of suppliers pushed back, some even publicly complained, and the retailer had to walk it back. It was a classic example of doing it wrong. Lucas: The right way is to negotiate, not dictate. That manufacturer I mentioned, they started with a pilot group of suppliers, had open conversations about cash flow needs, and even offered to help some of them factor their receivables if they needed quicker access to cash. The relationship actually got stronger because they were talking more openly about finances. Luna: That's a good point. It's like a partnership rather than a confrontation. But what about the administrative side? Doesn't changing terms for a bunch of suppliers create a mess for your AP department? Lucas: It can, if you don't plan it. The company I looked at made sure they updated their purchase order terms first, and they worked with their ERP system to schedule the payments correctly. There was a transition period of about a quarter where things were a bit bumpy, but after that, it was smooth. Lucas: They also gave suppliers a heads-up of two or three months before the new terms went into effect, so they could plan their own cash flows. That's just good supplier management. Luna: So what's your advice for a procurement professional who wants to try this but is nervous about upsetting suppliers? Lucas: Start small. Pick two or three suppliers where you have a strong relationship and you know their financial situation is solid. Approach them with a proposal that includes something for them, like a longer contract or a commitment to more volume. And be transparent about why you're asking. Lucas: Also, measure the impact. Track your working capital before and after. That'll give you the data to expand the program and to show your CFO that it's working. In the case I studied, they kept a scorecard of the savings and the supplier feedback. And that's what let them roll it out to more suppliers over time. Luna: That sounds like a solid playbook. And I guess it's a good reminder that not every cost saving has to come from squeezing the price per unit. Sometimes it's about how you structure the deal. Lucas: Exactly. And look, this is the kind of thing we talk about on this show all the time. If these conversations have given you a new idea or helped you approach a negotiation differently, that's exactly why we do this. And if you feel like supporting the show, there's a simple way to do that. You can buy us a coffee at buy me a coffee dot com slash fexingo. It's a low-key way to keep these episodes ad-free. But no pressure, honestly. The fact that you listen is already great. Luna: Yeah, and it does help us keep the lights on. So if you're so inclined, we appreciate it. But let's get back to the numbers here. Lucas: Right. So one thing I want to emphasize is that payment terms aren't just a finance lever. They're a relationship tool. The buyers who do this well are the ones who treat it as a partnership conversation, not a demand. Luna: And what about the suppliers? Do they ever come back and say, 'we want shorter terms' when things get tight for them? Lucas: That happens. And that's where the trust comes in. If you've built a good relationship and you've been transparent, they'll feel comfortable asking. And you can work something out, maybe a temporary acceleration or a discount in exchange for early payment. It's all part of the same conversation. Lucas: The bottom line is that payment terms are a powerful, often underused lever in the procurement toolkit. When done right, they can free up cash, strengthen supplier relationships, and improve your company's financial flexibility. And it's something that any buyer can start exploring, even with just a few key suppliers. Luna: I love that. It's actionable and not scary. Thanks for breaking it down, Lucas. Lucas: Anytime, Luna. And to our listeners, if you've tried renegotiating payment terms, we'd love to hear how it went. You can find us on the Fexingo network. Until next time.