Payment Terms Definitions
(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.
The simple calculation to help you understand the cash impact of payment terms is:-
Change in days to settlement ÷ 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 ||Explanation||Average time to settlement|
|15 days net||15 days from date of invoice||15 days|
|30 days net||30 days from date of invoice||30 days|
|30 days month end date of invoice||30 days after the end of the month in which the invoice was dated||45 days|
|60 days net||60 days from date of invoice||60 days|
|60 days month end date of invoice||60 days after the end of the month in which the invoice was dated||75 days|
See Also:-Return to Home Page from Payment Terms Definitions
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