What is payment terms optimization?
Payment terms optimization is the process of benchmarking supplier and customer payment terms against the market, identifying where opportunities exist, and optimizing those terms to unlock working capital. Calculum benchmarks terms against 7.5 million companies across 160+ countries.
What payment terms optimization is not?
- It is not Supply Chain Finance. Payment terms optimization determines what payment terms should be. Supply Chain Finance determines how those terms are funded once set. One sets the destination, the other provides the vehicle.
- It is not DPO extension. DPO is a blended, company-level accounting ratio. Payment terms are the actual commercial terms agreed supplier by supplier. The terms are what gets optimized; DPO movement is a downstream consequence.
- It is not a one-off exercise. Market norms shift, supplier bases change, and contracts renew on their own cycles. Market conditions evolve. Payment terms should be reviewed continuously rather than treated as a one-time exercise.
What the practice involves?
- Benchmark: understand what comparable companies achieve by category, geography and supplier tier.
- Quantify: translate the gap into a cash figure using daily spend.
- Prioritise: rank suppliers by opportunity size and likelihood of acceptance.
- Negotiate: approach each negotiation with market evidence rather than a target alone.
- Sustain: track actual payment days against contracted terms so improvements are sustained over time.
What it can release?
A 30 day extension frees approximately 82 million USD in working capital per 1 billion USD of annual spend. In an initial analysis, organizations typically identify a working capital opportunity of 8 to 11%, although the amount ultimately realized depends on current payment terms and supplier acceptance.
For the full calculation, targets and governance, see the payment terms optimization ROI model for CFOs.
