Cash & Working CapitalTalking Shop

Talking Shop: Extend Payment Terms to Optimize Working Capital?

By June 26, 2024No Comments

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Improving working capital management remains a high priority for many treasury teams coping with elevated inflation, concerns about recession and the opportunity to earn better returns on cash amid higher interest rates. Just this week, one treasurer asked if peers have “something akin” to a working capital policy.

  • “This may cover things such as standards for payment terms, owned inventory levels, use of the balance sheet to extend customer financing, etc.,” they explained on one of NeuGroup’s members-only online communities. “I’m just trying to get a sense for how common it is to have a formal policy around this.”
    • If you have an answer that NeuGroup can pass on anonymously, please send an email to [email protected].

As the questions above and below indicate, extending payment terms with suppliers is a reliable arrow in the working capital quiver of corporations that want to hold on to their cash longer. One option for extending those terms is a supply chain finance program where a third party, usually a bank, pays the supplier early in exchange for a discount. The corporate, meanwhile, can pay the bank (in full) on the extended terms the buyer negotiates with the supplier.

Member question: 
“What are your standard payment terms (30, 60, 90, 120 days) for suppliers? This excludes any early payment discount programs. Is anyone using supply chain financing programs? And if you are comfortable sharing, what banks?”

NeuGroup Insights
 reached out to this questioner for context. They said their company inherited payment terms of 60 days when it was spun off. “In an effort to optimize working capital solutions, we have an existing supply chain financing program and have had multiple banking partners suggest we could or should consider stretching our standard payment terms to hold on to our cash longer before paying suppliers,” they explained.

  • “The benchmarking exercise was to ‘fact check’ our banks as they have suggested many peers are in the 90–120-day standard payment terms with suppliers.”

Peer answer 1: “Our payment terms vary based on merchandise category and how long we typically hold merchandise before it sells (so no overall standard). We do have supply chain finance programs covering both domestic and import purchases. The banks we work with include J.P. Morgan, Citi, HSBC, Wells Fargo, Standard Chartered and Bank of America.”

Peer answer 2: 
“Similar to [the first response], we don’t have a standard, but instead try to match the terms with the inventory turns, with the goal of zero owned inventory. We have a supply chain finance program with Citi and we have a dynamic discounting program with C2FO.”

Peer answer 3: 
“Most payments of ours are run through third-party distribution centers; we pay those centers very quickly, usually under 15 days. They work the float. Other vendors will vary in the 30- to 60-day range. [Due to the nature of our business], we are accounts receivable and inventory ‘lite.’”

NeuGroup Insights
 asked the questioner whether they might extend payment terms through a supply chain finance program. “Potentially, yes,” they said. “But like some responders, it may not be across the board as some supplier relationships may not align with cookie-cutter terms.”

Justin Jones

Author Justin Jones

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