How do you calculate the working capital released by a payment terms change?

Multiply the terms gap by daily spend. On the payables side: (target payment days minus current payment days) multiplied by (annual COGS divided by 365). On the receivables side: (current collection days minus target collection days) multiplied by (annual revenue divided by 365). Calculum performs both calculations using supplier- and customer-level data.

Worked example on the payables side

A company with 500 million USD in annual cost of goods sold currently pays suppliers in 40 days. Benchmarking puts the sector median at 60 days, a gap of 20 days.

Cash released = 20 multiplied by (500,000,000 divided by 365) = 20 multiplied by 1,369,863 = approximately 27.4 million USD.

Worked example on the receivables side

The same company collects from customers in 55 days against a sector median of 45, a gap of 10 days, on 800 million USD of annual revenue.

Cash released = 10 multiplied by (800,000,000 divided by 365) = 10 multiplied by 2,191,781 = approximately 21.9 million USD.

What data the calculation needs?

The calculation requires four data points for each trading partner: the contracted payment terms, the actual payment dates over a representative period, annual spend or revenue, and the target. These are sufficient to quantify the payment terms gap and translate it into working capital.

Benchmarking the target is a separate step and needs more, including industry classification, country and the date range of the data, so that terms are compared against genuinely comparable companies. Neither step requires ERP integration. The accuracy of the result depends far more on the quality of the actual payment dates than on the sophistication of the system holding them.

What the cash released is worth?

Cash released has a financial value equal to the cost of capital it displaces. At a weighted average cost of capital of 8%, the 27.4 million USD above is worth approximately 2.2 million USD a year in avoided financing cost or investment return. For many boards, this figure is ultimately more meaningful than the headline liquidity number.

Three errors that inflate the figure

  • Using contracted terms rather than actual payment days. The two frequently differ. A supplier contracted at net 60 who is in practice paid in 38 days represents a different opportunity from one paid on time.
  • Applying one blended average across the whole base. A company-level figure hides the variation that makes the opportunity real. The gap is rarely evenly distributed, and the suppliers with the widest gaps are often not the largest.
  • Treating the entire gap as achievable. Some suppliers cannot absorb a change, and some relationships should not be tested. A credible model weights the opportunity by the probability of acceptance rather than assuming the full gap can be realized.

This calculation is one input to a full model. For targets, scenarios and governance, see the payment terms optimization ROI model for CFOs.

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