Payment Terms and Working Capital Calculator — Value of Extending Terms, Cost to the Supplier, Break-Even Price

Description
Payment terms are the most frequently requested and least frequently valued concession in procurement. A target arrives from treasury, the category manager asks every supplier for sixty days, and nobody establishes what the request is worth or what it costs the person being asked. The cost comes back later, in the unit price, where it is invisible.

This model prices both sides. Enter your annual spend, the current and proposed terms, and two cost of capital assumptions — yours and an estimate of the supplier's. It calculates the cash released, what that cash is worth to you annually, and what funding it costs them.

Then it produces the number that should govern the conversation: the break-even price rise. That is the increase which leaves the supplier exactly where they started after funding the longer terms. Above it, you have paid more for the cash than the cash is worth to you. Below it, you have a genuine trade. Taking that number into the discussion changes its character entirely — "we are asking for sixty days, we understand roughly what that costs you, and we will discuss up to this and no further" is a materially different conversation from asking for terms and pretending they are free.

The model also flags when the trade transfers value rather than creating it. Where your capital is cheaper than theirs, extending terms is efficient. Where it is not — and with smaller private suppliers it usually is not — you are moving cost into the price, and the sheet says so plainly.

The second sheet handles the mirror image. An early payment discount is a short-term loan you are making, and two per cent for paying twenty days early annualises above thirty-seven per cent. The sheet calculates the implied return and compares it to your own cost of capital.