Payment terms extend beyond operational logistics; they are powerful levers for managing liquidity and maximising financial efficiency. The configuration of vendor payments can enhance working capital efficiency, reduce operational expenses, and fortify supplier relationships, hence optimizing cash flow by managing supplier payment terms
However, terms like the 2/10 Net 30, net payment holds, and early payment discounts often confuse even seasoned finance professionals. A clear understanding of these concepts is crucial for maximizing financial performance, especially within subscription-based SaaS businesses, where runway, burn rate, and EBITDA are directly impacted by payables strategy.
Most companies miss out on early payment discounts or fail to align payment structures with working capital cycles and financing costs, leading to missed savings and strained cash flow.
Let’s break it down.
Understanding Payment Terms: The Basics
Payment terms have a direct impact on cash flow and working capital. By negotiating favorable terms, businesses can extend their payables, effectively retaining cash longer to fund operations or investments. On the flip side, early payment discounts can significantly reduce expenses.
Consider this: A 2% discount for paying within 10 days (instead of the full 30-day term) equates to an annualized return of ~36%—a better yield than many forms of financing.
Commonly used terms include:
The 2/10 Net 30: This means a 2% discount is offered for payments made within 10 days, with the full amount due in 30 days from the invoice date.. This illustrates the common dating convention where the payment period is calculated from the invoice date.
Net 30: Indicates that the full invoice amount is due 30 days after the invoice date, where the timeline includes all calendar days, not just business days.
Net 30: Calendar vs. Business Days
A frequent misconception is that “Net 30” refers to business days. It includes all calendar days, weekends and holidays included. This detail matters for accurate cash flow planning and avoiding late fees or vendor friction.
Strategic Payment Timing: When to Pay Early (or Not)
Deciding when to pay is more than just process compliance; it’s a strategic financial decision.
Early payments can secure discounts and improve vendor goodwill. Conversely, holding onto cash for the full term can improve liquidity and provide internal funding for operations or growth. The key problem for CFOs is balancing opportunity cost with working capital objectives.
Advanced Model: Net 30 Hold 30
The Net 30 Hold 30 model structures payments so that invoices must be submitted 30 days before the clock starts on a Net 30 term. This gives companies up to 60 days before funds are disbursed.
While this improves cash retention, it must be used thoughtfully, prolonged float periods can strain supplier trust and disrupt delivery timelines. Negotiating terms that reflect mutual benefit is critical, hence optimising cash flow by managing supplier payment terms.
Best Practices for CFOs and Finance Leaders
- Negotiate Strategically: Structure payment terms to reflect your working capital needs while maintaining strong supplier relations.
- Use Automation: Automating AP processes ensures timely payments, improves accuracy, and makes discount capture easier.
- Track Performance: Regularly monitor DPO (days payable outstanding), early payment discounts utilized, and their impact on cash flow.
- Align Internally: Ensure procurement, finance, and operations align on payment strategies to avoid missed opportunities.
Supplier payment terms aren’t just a back-office detail, they’re a core component of financial strategy, hence optimising cash flow by managing supplier payment terms. By mastering the nuances of structures like 2/10 Net 30 and exploring extended terms like Net 30 Hold 30, finance teams can optimize working capital, reduce costs, and fuel long-term growth.
Contact our Dallas office for a complimentary CFO consultation to explore the benefits of Fractional Accounting with Bright Balance today!
