How smart payment terms drive business success

You remember 10th-grade social studies, right?

The Treaty of Versailles. 1919. Germany signing on the dotted line and setting the stage for what would become a century of economic and geopolitical upheaval.

So, what’s the connection to payment terms? Everything.

The Allied Powers’ reparations plan was a masterclass in incompetence, and how misaligned payment terms can trigger unintended and unforeseen consequences — consequences that span across decades and borders.

It pays to note that Germany didn’t finish paying that debt until 2010. Over ninety years later. Let that sink in.

Now, while no one’s saying your accounts payable strategy will have significant historical impact, the point stands: Payment terms matter. They shape cash flow, working capital, and supplier relationships in ways that ripple through your business. Nail them, and you’re on a path to smoother operations and stronger financial health. Get them wrong? Well, the headaches could last longer than anyone wants.

Because optimized payment terms are so crucial, let’s explore how embracing some smart payment strategies can transform your financial operations and help drive business success.

Leveraging strategic payment terms

Embrace technology and automation

In an age of digitization and AI, manual management of payment terms is not just inefficient, but irresponsible. Leveraging AP automation platforms and AI-powered solutions provides real-time visibility into payables and cash flow, ensuring timely payments and preventing costly mistakes.

These systems offer invaluable data on payment timing and cash flow trends, enabling finance teams to fine-tune their strategic decisions on the fly.

Also, consider this: best-in-class AP organizations process invoices at $2.94 per invoice, compared to an average of $15.96 for the rest. That’s not just a cost saving; it’s a competitive advantage (it also gives AP serious organization clout). Automation doesn’t just speed up processes; it transforms them, allowing your team to focus on strategic initiatives rather than mundane tasks.

Master the art of negotiation

Effective negotiation can free up cash and strengthen supplier relationships. Collaborating with suppliers to find flexible payment schedules that benefit both parties is key. This isn’t about always pushing for the longest terms but finding a balance that benefits all parties. Successful negotiations can actually lead to extended payment terms or early payment discounts anyway, optimizing cash flow without impacting supplier relationships.

Remember, every day you extend your payment terms is a day of free financing for your business. But it’s a delicate balance – push too hard, and you risk alienating suppliers. Or worse, driving them into the arms of your competitors. With global supply chains in a continuously volatile state, approaching negotiations with a win-win instead of me-first attitude will pay dividends.

Standardize payment terms

While flexibility is important, standardizing payment terms as much as possible can significantly improve efficiency and cash flow management. This approach helps streamline workflows, prevents ad hoc negotiations that can negatively impact your Days Payable Outstanding (DPO), and provides a clear framework for supplier relationships.

But standardization doesn’t mean rigidity. Instead, it’s about creating a clear, consistent baseline from which you can make strategic exceptions. This approach allows for better forecasting, smoother cash flow management, and more efficient operations overall.

Optimize your payment mix

A diverse payment mix can unlock cash flow and generate revenue. Analyzing supplier terms and opportunities to optimize both spend and payment mix can result in cash back or ePayment rebates, turning your AP department into a revenue producer.

Consider implementing a Qualified ePayment program, focusing on Virtual Cards and enhanced ACH payments.

That being said, each payment method has its pros and cons. Checks might be familiar (and all too tenaciously used), but they’re slow and prone to fraud. ACH is faster and cheaper, but not all suppliers are set up to receive it. Virtual cards offer security and potential rebates but may face resistance from some vendors. The key is to find the right mix that balances your needs with those of your suppliers. Remember that paragraph about win-win negotiations above?

Prioritize supplier relationships

Strong supplier relationships are the backbone of effective payment term strategies. Maintain open communication about payment expectations and financial goals. Consider offering shorter payment terms to key suppliers while extending terms with others. Suppliers who trust you are more likely to work with you on payment terms that meet your financial needs. In fact, they’re more likely to work with you, period.

Think of your suppliers as partners in your success. When you help them succeed, they’re more likely to stay with you during tough times. This might mean faster payments for a supplier facing cash flow issues or more flexible terms when you’re navigating a challenging quarter.

We’ll say it again, optimizing payment terms requires guardrails, not straitjackets.

Master the timing game

According to the Harvard Business Review, timing is key to great strategies.

Along those lines, payment timing is crucial for optimizing working capital and cash flow. Analyze opportunities to better leverage payment terms for both cash management and increasing qualified ePayment acceptance, which can have trickle-down effects for maintaining strong supplier relationships.

Consider implementing a dynamic discounting program. This allows suppliers to offer discounts for early payment, giving you the flexibility to choose when to pay based on your current cash position. Suppliers get paid faster when they need it, and you capture discounts when you have excess cash. Like the HBR says, success is all about perfect timing.

Leverage outside expertise

A Managed Accounts Payable solution offers a (arguably simpler) strategic approach to optimizing payment terms. By combining service, technology, and financing, this end-to-end offering streamlines your payments process and serves as the payment execution arm to your Treasury department.

The solution enables straight-through processing with automated two- and three-way matching, driving coding and approvals while managing exceptions. This results in touchless e-invoicing and improved business visibility, allowing for data-driven decisions on payment timing.

With Managed AP, you can standardize payment terms across suppliers, easily identify and capture early payment discount opportunities, and optimize your Days Payable Outstanding (DPO). This comprehensive approach not only enhances efficiency but also provides the flexibility to adjust payment strategies based on cash flow needs, ultimately leading to better working capital management and stronger supplier relationships

The ripple effect of solid payment terms

When you master these strategies, the benefits will course through your entire organization:

1. Improved cash flow management: By optimizing payment terms, you ensure that your cash flow remains steady and predictable, allowing for better financial planning and investment in growth opportunities.
2. Stronger supplier relationships: Balanced and fair payment terms lead to happier suppliers, which can result in better service, more favorable negotiations in the future, and a more resilient supply chain.
3. Increased operational efficiency: Automation and streamlined processes reduce the time and resources spent on managing payments, allowing your team to focus on more strategic tasks that drive business value.
4. Enhanced financial control: Real-time visibility into payables and receivables allows for more informed decision-making and better overall financial management, reducing the risk of cash flow crunches or missed opportunities.
5. Risk reduction: By implementing robust fraud detection measures, you can mitigate the risk of financial fraud.
6. Revenue generation: Optimized payment terms, especially through qualified ePayments, can turn your AP department into a source of revenue through cash back and rebates, transforming a cost center into a profit center.
7. Competitive advantage: Companies that master their payment terms often find themselves with more working capital, allowing them to seize opportunities and invest in growth more readily than their competitors.

Optimize payment terms with Corcentric

Corcentric offers comprehensive solutions to help businesses optimize their payment terms strategies within the broader context of AP automation. Our suite of tools includes:

1. AP automation platforms for real-time visibility and efficient processing, reducing invoice processing time by up to 70%.
2. ePayment solutions to maximize cash back opportunities and streamline payment processes.
3. Managed Accounts Payable services to streamline invoice processing, optimize payment timing, and enhance supplier relationships while improving working capital management.
4. Expert consulting to help negotiate and implement optimal payment terms, ensuring you’re getting the most value from your supplier relationships.

By leveraging Corcentric’s expertise and technology, businesses can transform payment processes, enhance supplier relationships, and drive financial success. Our solutions address not only payment term optimization, but also the entire procure-to-pay / order-to-cash cycle, ensuring a holistic approach to AP management.

The upshot

While your payment terms might not reshape the modern world, they’re no less critical to your company’s financial health and future. By adopting these smart payment strategies, you’re not just optimizing a process – you’re setting the stage for long-term financial success and resilience.

Remember, payment terms are more than just numbers on an invoice. They’re a strategic tool that, when wielded effectively, can transform your financial operations, strengthen your supply chain, and position your company for sustainable growth.

So, take a page from history. Learn from the past, optimize for the present, and set payment terms that will positively shape your company’s future. Who knows – the strategic decisions you make today could be felt for years to come.