Calculating payment term changes
13 September 2012
Q: How can I quantify the financial benefit of agreeing shorter payment terms with suppliers (or calculate the damage by extending them)? It would be useful to be able to do this quickly when negotiating pricing levels.
A: Steve Thomas, director of PMMS Consulting Group, writes: You are right to value the range of variables that make up the potential deal, and payment is one of these. The effect of the payment term is, of course, much greater when interest rates are higher than the 5-6 per cent that can be earned today in a risk-free short-term account...