Payment terms savings calculator
Calculate the working-capital value of extending supplier payment terms and compare it with an early-payment discount.
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What payment-term value actually means
Extending supplier payment terms does not reduce what you pay. It changes when you pay, which leaves cash in the business for longer. The value of that cash is what it would have cost to borrow, or what it could earn instead, over the extra days you hold it.
This is a working-capital and financing effect, not a price reduction. Reporting it in the same total as negotiated price savings overstates what procurement delivered, and it is the first thing a Finance reviewer will separate out.
Calculate one supplier agreement
The worked example below is filled in already. Change any value and the result updates.
Result
- Additional payment days
- +30 days
- How much later the supplier is paid under the proposed terms.
- Cash released, one-time
- +$164,384
- Average cash that stays in the business. A balance-sheet change, not an annual figure.
- Annual financing value
- $13,151
- What holding that cash is worth each year at your cost of capital.
- Annual discount value
- $40,000
- What the discount is worth across a year of spend. This one is a price reduction.
- Effective annualized return
- 37.2%
- What the discount earns on cash parted with early, as an annual rate.
- Your cost of capital
- 8%
- The rate the effective return is compared against.
The early-payment discount looks economically stronger
Its effective annualized return is above your cost of capital, so the discount is worth more than the value of holding the cash longer. It only holds if the business genuinely has the cash to pay early.
Before this is reported. Cash released is one-time, not annual. The financing value is an avoided cost rather than a price reduction. Neither belongs in a hard savings total unless Finance has agreed that treatment.
This calculator produces an estimate from the figures you enter. It is not accounting, tax or financial advice, and it does not decide how your organization reports a benefit. Finance approves the treatment.
The formulas
Four lines of arithmetic. Every figure the calculator shows comes from one of them.
- Cash released
- Annual supplier spend × (proposed days − current days) ÷ 365
- The average amount of cash that stays in the business because you pay later. It is a one-time balance-sheet change, not an amount that recurs every year.
- Annual financing value
- Cash released × annual cost of capital
- What holding that cash is worth per year, valued at what the money costs you. This is the recurring figure, and it is much smaller than the cash released.
- Annual discount value
- Annual supplier spend × discount percentage
- What an early-payment discount is worth across a year of spend. Unlike the financing value, this one is a genuine price reduction.
- Effective annualized discount return
- discount rate ÷ (1 − discount rate) × 365 ÷ (standard payment day − discount payment day)
- What the discount earns on the cash you part with early, expressed as an annual rate so it can be compared directly with your cost of capital.
A complete worked example
Two million dollars of annual spend with a supplier, currently paid on Net 30. The supplier offers either Net 60 or a 2 percent discount for paying on day 10. The business borrows at 8 percent.
- Annual supplier spend
- $2,000,000
- Current payment terms
- Net 30
- Proposed payment terms
- Net 60
- Annual cost of capital
- 8%
- Alternative offer
- 2% discount for payment on day 10
- Additional payment days
- 60 − 30 = 30 days
- Cash released
- $2,000,000 × 30 ÷ 365 = $164,384
- Annual financing value
- $164,384 × 8% = $13,151
- Annual discount value
- $2,000,000 × 2% = $40,000
- Effective annualized discount return
- 2% ÷ 98% × 365 ÷ (30 − 10) = 37.2%
The discount returns 37.2 percent annualized against a cost of capital of 8 percent, so paying early is worth more than holding the cash longer. It is worth $40,000 a year against $13,151. That holds only if the business actually has the cash to pay on day 10; a company short of cash can be right to take the slower option and the lower number.
Neither figure is a procurement saving in the sense a savings report means. The $40,000 is a price reduction and could be, if Finance agrees the treatment. The $13,151 is an avoided financing cost and normally is not. The methodology guide sets out how the two are kept apart.
Payment terms against early-payment discounts
They are alternatives on the same spend, not additions. You cannot pay on day 10 to earn a discount and on day 60 to hold the cash.
| Aspect | Extending terms | Early-payment discount |
|---|---|---|
| What changes | When you pay. The price is unchanged. | What you pay. The date moves earlier. |
| Where it shows up | Working capital and the cash-flow statement. | The invoice, and therefore the P&L. |
| Recurring or one-time | The cash release is one-time. The financing value recurs annually. | Recurs on every invoice taken at the discounted rate. |
| Cost to the business | Usually none directly, though the supplier may price it in. | Requires cash on hand earlier than planned. |
| Effect on the supplier | They finance the gap, and may raise prices or push back. | They get paid sooner, which they are paying you for. |
| How to judge it | Compare the financing value with your cost of capital. | Compare the effective annualized return with the same cost of capital. |
Working-capital benefit against procurement savings
The distinction matters because both get reported in the same slide, and only one of them survives review.
A price reduction lowers what the business pays
Same goods, same quantity, lower invoice. It reaches the P&L and reduces a budget line, which is what most savings policies mean by a hard saving.
A working-capital benefit changes when cash moves
The invoice total is identical. Cash sits in the business for longer, which is worth something, but nothing about the cost of what was bought has changed.
The financing value is an avoided cost, not a gain
It is the interest you did not pay, or the return you earned instead. Real, and worth pursuing, but it belongs in a treasury or working-capital line rather than a savings total.
Mixing them is how a savings report stops reconciling
Finance can trace a price reduction to an invoice. A financing benefit cannot be traced that way, so a total containing both cannot be reconciled to the ledger.
For a negotiated price reduction rather than a timing change, use the procurement savings calculator. To see how both sit in a portfolio, explore the interactive savings dashboard.
When Finance may reject the calculation
01
The benefit is reported as a hard saving
The most common rejection. A working-capital effect in a savings total will be moved out of it, and the rest of the report will be read more sceptically afterwards.
02
The cost of capital is not the company’s
Using a market rate rather than the rate Treasury actually applies produces a number Finance did not agree to. Ask for the figure they use.
03
The cash release is annualized
Cash released is a one-time change in the balance sheet. Reporting it every year, or adding it to an annual figure, double counts it.
04
The supplier priced the extension in
If the unit price rose in exchange for longer terms, the financing benefit has already been paid for. Compare against the pre-extension price.
05
The extended terms are not actually being used
If accounts payable keeps paying on the old schedule, no cash is released. The benefit needs payment-run evidence, not a contract clause.
06
The discount cannot be funded
An early-payment discount that the business has no cash to take is not a benefit. Confirm availability before claiming it.
How to document the result
- Record the supplier, the annual spend used and the period it covers.
- Record the current and proposed terms, and where each is evidenced.
- Record the cost of capital and who provided it.
- Show the cash released and the annual financing value as separate figures.
- State plainly that the benefit is working capital, not a price reduction.
- If a discount was compared, record its terms and the effective annualized return.
- Get the reporting treatment agreed by Finance before the figure appears anywhere.
- Attach payment-run evidence once the new terms are actually in use.
The free Excel tracker has a column for evidence status and a Finance decision, which is where a working-capital benefit belongs once the treatment is agreed.
Payment terms questions
Multiply annual supplier spend by the number of additional payment days and divide by 365. That gives the cash released. Multiply the cash released by your annual cost of capital to get the annual financing value. For example, $2,000,000 of spend moving from Net 30 to Net 60 releases about $164,384, worth about $13,151 a year at an 8 percent cost of capital.
Usually not. Extending terms changes when you pay rather than what you pay, so the invoice total is unchanged and nothing reaches the P&L as a price reduction. Most organizations report it as a working-capital benefit in its own line. Your organization decides its own treatment with Finance.
Cash released is a one-time change: the average amount that stays in the business because payment moved later. The annual financing value is what holding that cash is worth each year, valued at your cost of capital. The first is much larger and does not recur. Reporting the cash released as an annual figure overstates the benefit by a wide margin.
Convert the discount to an annual rate and compare it with your cost of capital. For 2/10 net 30 the calculation is 2 percent divided by 98 percent, multiplied by 365 divided by the 20 days the payment is brought forward, which is about 37.2 percent. If that exceeds your cost of capital, the discount is worth more than holding the cash. The two are alternatives, so only one can be taken.
Yes, and separately from price savings. Show the cash released and the annual financing value as their own figures, state the cost of capital you used and where it came from, and let Finance decide the reporting treatment before the number appears in a savings report.
No. The calculator runs entirely in your browser. The spend, terms, cost of capital and discount you enter are never sent to ProcSave, never placed in the page address, and never included in analytics. Copying or printing the result happens on your own machine.
Payment terms are one line in a savings report
Once the working-capital benefit is agreed, the harder part is keeping it apart from price savings across every initiative, with the evidence and the Finance decision attached. That is what ProcSave is being built to do.
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