Cash is oxygen. Every finance director knows this. Every business that's struggled with cash flow—which is most of them, at some point—knows this viscerally. How you manage the timing of money in and money out determines whether you thrive, survive, or fail.

Supplier payment terms are a critical lever in this equation. The difference between paying in 14 days versus 45 days can represent millions in working capital. Managing this lever well is as important as any other financial decision.

The Working Capital Arithmetic

The maths is straightforward but often underappreciated. If you spend £50 million annually with suppliers and extend average payment terms by 30 days, you've freed approximately £4 million in working capital. That's money available for investment, debt reduction, or crisis buffer—without additional borrowing.

The reverse is equally true. Paying faster than necessary ties up capital unnecessarily. Every day of payment acceleration is cash that could be earning returns elsewhere.

This arithmetic doesn't mean you should pay as slowly as possible. Payment timing involves trade-offs—early payment discounts, supplier relationships, ethical considerations. But understanding the working capital impact is essential for making those trade-offs intelligently.

Standard Terms vs. Negotiated Terms

Most suppliers have "standard" payment terms, but these are starting positions rather than fixed requirements. Almost everything in commercial relationships is negotiable, and payment terms are no exception.

The negotiating leverage depends on your relative position. Large buyers can often secure extended terms simply by asking. Strategic suppliers to whom you represent significant volume have incentive to accommodate your preferences. New suppliers eager for business may accept longer terms to win the relationship.

The key is asking. Many organisations pay on whatever terms the supplier first quoted, never realising that better terms were available. Simply including payment terms as a negotiating variable—alongside price, quality, and service—captures value that would otherwise be left on the table.

Early Payment Discounts

Many suppliers offer discounts for early payment. "2% 10 Net 30" means a 2% discount for paying in 10 days rather than the standard 30 days. This seems small, but the implied cost of not taking the discount is substantial.

Forgoing a 2% discount to pay 20 days later is equivalent to borrowing money at approximately 37% annual interest. Very few organisations have capital that expensive. If you have the cash available, taking early payment discounts almost always makes financial sense.

The challenge is operational. Capturing early payment discounts requires invoices to be received, approved, and processed quickly. If your accounts payable process takes 25 days, you can't pay in 10 regardless of strategic intent. Process improvement may be prerequisite to discount capture.

Dynamic discounting platforms now enable more flexible arrangements. Rather than fixed terms, suppliers can offer sliding scale discounts—higher for earlier payment, lower as payment date extends. This flexibility benefits both parties.

Supply Chain Finance

Supply chain finance programmes offer another option. You use a financial institution's balance sheet to pay suppliers early while you pay the bank later. Suppliers get cash when they need it; you get extended payment terms; the bank earns a margin in the middle.

These programmes work particularly well when there's a credit differential. If your organisation has stronger credit than your suppliers, the bank can fund supplier payments at rates lower than suppliers' own borrowing costs. Everyone benefits.

The complexity and cost of establishing supply chain finance means it's typically viable only for larger organisations and significant supplier relationships. But for those it fits, it can materially improve working capital while simultaneously supporting supplier health.

Ethical Considerations

Payment terms aren't purely a financial calculation. Ethical considerations matter, particularly with smaller suppliers for whom payment timing can mean the difference between viability and failure.

Large organisations extending aggressive payment terms to small suppliers essentially force those suppliers to provide free financing. This shifts working capital pressure to those least equipped to handle it. Some suppliers are driven to distress or failure by customers who pay too slowly.

The UK Prompt Payment Code represents voluntary commitment to reasonable payment practices. Signatories commit to paying 95% of invoices within 60 days and to working toward 30-day payment. While not legally binding, adherence signals ethical intent.

Public sector payment regulations are more stringent. Government contracts typically require 30-day payment and impose requirements to flow prompt payment through to subcontractors. Non-compliance can affect future contract eligibility.

Managing the Accounts Payable Process

Payment terms only matter if you can actually manage to them. Many organisations have payment terms policies that bear little relationship to actual payment timing.

Invoice processing delays push payment later than terms suggest. If invoices take three weeks to process through approvals, a 30-day term becomes effectively 51 days. This damages supplier relationships even when the stated terms seem reasonable.

Payment run frequency affects timing. If you only run payments weekly and the invoice just missed the cut-off, payment slides by another week. For suppliers counting on predictable cash flow, this variability creates problems.

Dispute resolution processes can create indefinite delays. Invoices stuck "in query" continue aging while issues are slowly resolved. Suppliers may have delivered perfectly but still wait months for payment because of internal administrative problems.

Effective payment term management requires controlling these operational factors as much as negotiating the terms themselves.

Supplier Segmentation

Not all suppliers warrant the same payment approach. Segmentation helps match strategies to circumstances.

Strategic suppliers whose relationship matters may receive faster payment as a relationship investment. The working capital cost is offset by goodwill, responsiveness, and preferential treatment in constrained situations.

Commodity suppliers where you have leverage can receive extended terms. The relationship is transactional; financial optimisation is appropriate.

Small or vulnerable suppliers may deserve ethical consideration even when leverage exists. Destroying small businesses through payment pressure isn't consistent with responsible sourcing.

Discount-offering suppliers should receive prioritised payment when the maths favours taking discounts. Process should ensure these opportunities aren't missed.

Visibility and Control

Managing payment terms effectively requires visibility of current position and control of future commitments.

Aging analysis shows where payments stand relative to terms. What proportion are within terms? What proportion are overdue? Where are the problem areas?

Cash flow forecasting incorporates payment timing. When will upcoming payments fall due? How does this match expected receipts? Where are the pinch points?

Term negotiation tracking ensures commitments are captured and applied. If you negotiate 60-day terms, the system should enforce them—not revert to supplier defaults because nobody updated the master data.

The goal is deliberate management of payment timing rather than accidental outcomes driven by process failures and default settings. Cash flow is too important to leave to chance.