Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Payment Terms to Unlock 12 Percent Savings
Transcript
- Lucas: So there's this lever in procurement that almost everyone overlooks. It's not about unit price, it's not about volume discounts — it's about when you actually hand over the money. Luna: Payment terms. You're talking about stretching net-30 to net-60, that kind of thing. Lucas: Exactly. And I want to walk through a real example. A mid-size manufacturer — let's call them Acme Manufacturing — they had about fifty million dollars in annual procurement spend. Mostly raw materials, some MRO. And like most companies, they were on standard net-30 terms with almost every supplier. Luna: So net-30 means they pay thirty days after invoice. That's pretty standard. Lucas: Right. And it's fine. But their CFO came to procurement and said: we need to improve working capital. So the procurement team — led by a buyer named Sarah — she looked at the cash conversion cycle and realized that if they could push payment out to net-60 without damaging supplier relationships, they'd effectively get an interest-free loan for an extra thirty days. Luna: But suppliers don't just say yes to that. They need something in return. Lucas: That's the key insight. Sarah didn't just demand longer terms. She offered something: a two percent early payment discount if suppliers chose to get paid in ten days instead of thirty. So the suppliers had a choice — get paid fast at a slight discount, or wait the full sixty days. Luna: So it's a win-win? Suppliers get liquidity if they need it, Acme saves two percent. Lucas: That's the theory. But here's where the numbers get interesting. Sarah calculated that if half their suppliers took the early payment option, Acme would save about two percent on twenty-five million dollars — that's five hundred thousand a year. But the other half? They'd wait sixty days, and that improved Acme's cash flow by roughly twelve million dollars on average over the year. Luna: Hold on — how do you get twelve million from that? Lucas: Because if you have fifty million in annual spend, and half is on net-60 instead of net-30, that means at any given time, you're holding onto about an extra thirty days of cash for that half. Twenty-five million divided by twelve months — roughly two million a month — times one extra month gives you two million in additional float. But the real number is cumulative: over the year, the average extra cash in hand is about twelve million. Luna: Okay, so the cash flow benefit is huge. But the savings from the early payment discounts — five hundred thousand — that's only one percent of total spend. Not the twelve percent your headline promised. Lucas: Right, I'm getting there. The twelve percent comes from looking at the return on that early payment discount. A two percent discount for paying twenty days early — because net-30 with payment in ten means you're paying twenty days sooner than the original net-30 — that's an annualized rate of about thirty-six percent. But Sarah didn't use that for the whole portfolio. She targeted the discount only on categories where suppliers were cash-constrained and likely to take it. On those categories, she got a two percent saving on the spend. For the whole portfolio, the blended savings was about one percent. Luna: So where does twelve percent come from? Lucas: Let me reframe. The CFO looked at the overall financial impact: the combination of interest saved on the cash flow improvement — they were borrowing at six percent at the time — plus the early payment discounts. The interest saved on the twelve million average float was about seven hundred twenty thousand a year. Add the five hundred thousand in discounts, that's one point two two million on a ten million dollar improvement in net working capital. That's about twelve percent return on the working capital improvement. Luna: Ah, so the twelve percent is the return on the working capital freed up, not the spend. That makes more sense. Lucas: Exactly. And that's the kind of number that gets a CFO's attention. But the real lesson is how they implemented it. Sarah didn't just send a letter saying 'we're changing to net-60.' She segmented suppliers by category and by relationship. Luna: What did that segmentation look like? Lucas: She put suppliers into three buckets. Strategic partners — long-term, hard to replace — she offered them a choice: net-60 with no discount, or net-30 with a one percent discount. Most picked net-60, and the relationship stayed strong because they felt they had a choice. The second bucket was competitive commodity suppliers — things like standard fasteners, office supplies. There she said: 'We're moving to net-60, but you can opt into net-10 with a two percent discount.' Many took the early payment because they valued liquidity. Luna: And the third bucket? Lucas: Small suppliers, often minority-owned or local, who might really need the cash. For them, she kept net-30 but offered a one percent discount for payment in ten days. She didn't want to squeeze them. The net effect was that over ninety percent of suppliers accepted the new terms within six months. Luna: That's impressive. But is there a risk that suppliers just raise their prices to compensate for the longer terms? Lucas: That's the classic concern. And Sarah tracked that. She compared price increases from suppliers in the new program against a control group of suppliers that stayed on net-30. Over two years, there was no statistically significant difference. The reason is that most suppliers factor payment terms into their pricing already — they assume net-30. If you offer them a choice, they're not going to raise prices just because you gave them a faster pay option. Luna: So the key is making it optional. That's a really different approach from a lot of companies that just mandate longer terms. Lucas: Exactly. Mandated terms often backfire. Suppliers either push back, or they embed the cost in their pricing. But when you give them a menu — early payment at a discount, standard terms, or extended terms — you're essentially offering a financing choice that benefits both sides. The buyer gets improved cash flow and lower cost, the supplier gets liquidity when they need it. Luna: And this is the core of what's called supply chain finance, or dynamic discounting. There are platforms that automate this. Lucas: Right. There are third-party platforms where a buyer can upload invoices, and suppliers can choose to get paid early at a discount — the platform handles the math. Some even let suppliers set their own discount rate. The buyer gets the savings, the platform takes a small fee. But Sarah's approach was simpler: she did it manually with a spreadsheet and clear communication. Luna: For a smaller buyer without a lot of IT resources, that manual approach might be the only option. Can they still get meaningful savings? Lucas: Absolutely. Even on a five million dollar spend, the math works. Suppose you have five million in annual procurement. You extend half to net-60, and twenty percent of suppliers take a two percent early pay discount. That's two percent on one million dollars — twenty thousand in savings. Plus the cash flow improvement: two point five million on net-60 instead of net-30 frees up about two hundred thousand in average float. At six percent interest, that's twelve thousand. So total benefit thirty-two thousand on a relatively small spend. Not life-changing, but it's a low-effort win. Luna: And it gets bigger as spend grows. Also, if the buyer can negotiate a higher discount — say three percent — the numbers jump. Lucas: Right. But there's a ceiling. If you push too hard, suppliers will push back. The rule of thumb is that the discount should be less than the supplier's own cost of capital. If a supplier can borrow at eight percent, a two percent discount for paying twenty days early — which annualizes to about thirty-six percent — is hugely attractive. But if you offer one percent, it's still attractive relative to their cost of capital. So you have room. Luna: One thing that's interesting is that this strategy also gives you data on which suppliers are cash-strapped. If they consistently take the early payment option, that's a signal. Lucas: That's a really sharp point. Sarah used that data to flag suppliers that might be at financial risk. If a supplier suddenly stops taking early payment, it could mean they're having trouble — or it could mean they've improved their cash position. Either way, it's a useful early warning indicator. Luna: So payment terms are not just a financial tool — they're a risk management tool too. That's a big takeaway. Lucas: Exactly. And I think the broader lesson is that procurement shouldn't just focus on unit price. The timing of cash flows is a huge lever. If these conversations have moved your work forward in some small way, we'd love it if you considered supporting the show. It keeps us independent and ad-free. You can do that at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to help us keep bringing you these deep dives. We really appreciate it. Lucas: So back to the story — after two years, Acme Manufacturing had saved over two million dollars from this program alone. And the suppliers — most of them — were happy because they had a choice. The ones that needed cash got it. The ones that didn't, waited. Luna: And the CFO was thrilled. Two million on a fifty million spend is a four percent saving, purely from payment terms. Not bad. Lucas: And that's the kind of win that gets procurement a seat at the table. So next time you're looking at your supplier portfolio, ask yourself: are my payment terms a tool, or just a default? Because they can be a lot more than that.