What is terms leakage?
Terms leakage is the gap between the payment terms a company has contracted and the days it actually takes to pay. Terms negotiated at net 60 but settled on day 40 leak 20 days of working capital. Calculum measures both figures to make the gap visible at the trading partner level.
Terms leakage is a common reason a payment terms initiative can show contractual success without a corresponding working capital improvement. The negotiation succeeded, but the payment process did not reflect the new payment terms.
What causes terms leakage?
Three common causes of terms leakage are: approval workflows that release payment early to capture discount windows, manual overrides by accounts payable staff responding to supplier pressure, and ERP configurations that default to shorter payment terms than the contract specifies. Calculum makes each of them visible per trading partner.
- Discount window pressure: an early payment discount can be worth taking, but only when the annualised value exceeds the cost of the capital released. That calculation is rarely run at invoice level.
- Manual override: a supplier requests earlier payment and an accounts payable clerk brings the payment date forward. Reasonable in the individual case, material in aggregate, and not visible in company-level reporting.
- System defaults: the ERP holds terms that were never updated after renegotiation, so new terms exist in the contract and nowhere else.
None of the three appears problematic from inside the function causing it, because each decision is reasonable in isolation. This is why terms leakage persists in organizations that are otherwise well managed.
How much does terms leakage cost?
The cost is the leaked days multiplied by daily spend. A company with 500 million USD in annual COGS leaking an average of 15 days across its base is realizing roughly USD 20.5 million less in working capital than its contracted payment terms would otherwise support.
Leakage can also concentrate in relationships where payment terms were recently improved, meaning part of the value created through successful negotiation may be lost during execution.
How do you stop terms leakage?
Measure contracted terms against actual payment dates per trading partner, make the working capital value of compliance visible to the accounts payable team, and correct ERP terms at the point of renegotiation rather than at the next data cleanse. Calculum reports both figures side by side.
- Measure it first. Terms leakage cannot be managed while it is reported as a single company average. Visibility is required at trading partner level.
- Change what AP is measured on. Working capital improvements land on the balance sheet, not the income statement. A team measured purely on P&L outcomes has no reason to protect them.
- Update the system at the point of change. A renegotiated term that does not reach the ERP within the payment cycle has already started leaking.
Terms leakage is step 5 of the wider remediation sequence in how to fix payment terms target misses in 7 steps.
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