Payment terms are the most frequently requested and least frequently
valued concession in procurement. A target arrives from treasury, the
category manager asks every supplier for sixty days, and nobody
establishes what the request is worth or what it costs the person being
asked. The cost comes back later, in the unit price, where nobody connects
it to the request that caused it.
This model prices both sides of the trade.
WHAT IT DOES
Enter your annual spend with a supplier, the current and proposed payment
terms, and two cost of capital assumptions: your own, and an estimate of
the supplier's. Ten supplier rows are provided with totals.
The model calculates the working capital released, what that cash is worth
to you annually, and what funding it costs them. Then it produces the
number that should govern the whole conversation: the break-even price
rise, which is the increase that leaves the supplier exactly where they
started after funding the longer terms.
Above that number, you have paid more for the cash than the cash is worth
to you. Below it, you have a genuine trade. Carrying it into the
discussion changes the character of the negotiation entirely. Saying "we
are asking for sixty days, we understand approximately what that costs
you, and we are prepared to discuss up to this figure and no further" is a
materially different conversation from asking for terms and pretending
they are free.
The model also flags when a trade transfers value rather than creating it.
Where your capital is cheaper than the supplier's, extending terms is
efficient and the sheet says so. Where it is not – and with smaller
private suppliers it usually is not – you are moving cost into the price,
and the sheet says that too.
THE SECOND SHEET
Early payment discounts, from the other direction. A discount for paying
early is a short-term loan you are making to the supplier, and the return
is far higher than most people assume: two per cent for paying twenty days
early annualises above thirty-seven per cent. The sheet calculates the
implied annual return on any discount offered, nets off the financing
cost, compares the result to your own cost of capital, and returns a
verdict.
There is also a commercial signal in it worth noticing. A supplier who
offers early payment terms readily needs cash, and a supplier who needs
cash values volume and certainty more than they value list price. WHO THIS
IS FOR
Category managers and procurement leads who negotiate commercial terms and
have to defend the outcome to a finance function. Consultants who need a
defensible model in the first week of an engagement. Finance business
partners who validate what procurement claims. It assumes professional
judgement and supplies the arithmetic, not the other way round.
HOW THE FILE IS BUILT
One Excel workbook, self-contained. A read me sheet stating what the model
does, how to use it and what it is not. The working sheets, with a worked
example filled in throughout and designed to be overwritten. A licence
sheet.
Every cell is unlocked. Every formula is visible and editable. Nothing is
password-protected, because a model a professional cannot adapt into their
own situation is worth nothing. The colour convention is consistent across
the whole catalogue: a yellow fill with blue text is an input you supply,
black text is a formula, green text is a reference to another sheet.
WHAT IS DELIBERATELY NOT IN IT
No benchmarks. No market prices, no index forecasts, no industry margin
ranges, no assumed cost of capital held as a constant. Every field of that
kind is an input, left empty or left as an example, and labelled as an
input. A fabricated benchmark is worse than no benchmark, because a
fabricated number gets reported and then defended.
This is educational and commercial material. It is not legal, tax,
financial or accounting advice and it creates no professional
relationship. Where the subject touches contract wording, classification
or regulation, the file says plainly where your own adviser has to take
over.
LICENCE
Use inside one organisation by up to ten named users, with unlimited
internal adaptation. No resale, redistribution or use as the basis of a
training or consultancy product supplied to third parties. The author
terms inside the file prevail over any more permissive default marketplace
terms.
Got a question about the product? Email us at support@flevy.com or ask the author directly by using the "Ask the Author a Question" form. If you cannot view the preview above this document description, go here to view the large preview instead.
Source: Best Practices in Procurement Strategy, Working Capital Management Excel: Payment Terms & Working Capital Calculator Excel (XLSX) Spreadsheet, Davide Sferrazza
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