Payment Terms Definitions

by Rich
(Seattle, WA, US)

Is there a place where I can get payment terms definitions and understand the value of different creditor payment terms? What am I giving up with specific payment terms less or more than net 30?

My company has been selling products and agreeing to what I consider to be adverse payment terms like net 60 just because that's what the customer has in their contract (without us bothering to negotiate). I'm finding that we are accepting those terms without realizing what it's costing us in terms of cash flow and interest we owe on other liabilities. Is there a spreadsheet that compares the value of different payment terms to net 30? Years ago I saw such a tabulation but lost track of it.
Thanks.
Rich

Answer:-
Rich,

The simple calculation to help you understand the cash impact of payment terms is:-

Change in days to settlement รท 365 X annual spend or revenue

As I said above, this gives you in absolute terms the cash impact. If you have borrowed money to finance your business then to calculate the cost to your business you need to multiply your answer above by your cost of capital.

For a public company that uses a combination of debt and equity this will be somewhere near 10% and if you are a private business that it is effectively your bank interest rate.

To help you understand the impact of a change in payment terms I've included a table that gives you the most common payment terms definitions and how they translate into time to settlement. There are many others but I hope that you will be able to see the pattern and therefore interpret them yourself if need be.

Terms ExplanationAverage time to settlement
15 days net15 days from date of invoice15 days
30 days net30 days from date of invoice30 days
30 days month end date of invoice30 days after the end of the month in which the invoice was dated45 days
60 days net60 days from date of invoice60 days
60 days month end date of invoice60 days after the end of the month in which the invoice was dated75 days


See Also:-
Credit Management Tools
Giving Credit
Invoice Clients Effectively
Chasing For Payment
Managing Cashflow Effectively

Return to Home Page from Payment Terms Definitions

Comments for
Payment Terms Definitions

Average Rating starstarstarstar

Click here to add your own comments

Dec 05, 2011
Rating
starstarstarstar
error?
by: Martha

Just checking re your payment terms table of examples & definitions - in the bottom left box you meant 60 days not 30, didn't you?

Otherwise it was most helpful in settling an argument and some confusion!

Paul writes
Thanks Martha! You are absolutely right. I'll correct it forthwith!

Click here to add your own comments

Join in and write your own page! It's easy to do. How?
Simply click here to return to FAQ's