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Pricing, payment terms and cost
Working capital calculator: what longer payment terms are worth
Enter your yearly spend with a supplier, the current and proposed payment terms and your cost of capital. You get the cash released, the yearly benefit and the cost passed to the supplier.
Every extra day of payment terms frees one day of spend, which is yearly spend divided by 365. Moving from 30 to 60 days at the default spend frees USD 197,260 once and is worth USD 17,753 a year.
Written by Procurement VMS Editorial Team · Reviewed by Michael, Procurement Advisor Expert · Updated
Your numbers
The boxes start with an example so you can see how it works. Replace them with your own figures.
Your result
The move costs the supplier more than it earns you. Expect pushback or a price rise to cover it, and consider paying a fair share of the difference.
| Cash released one time | USD 197,260 |
|---|---|
| Yearly benefit to you | USD 17,753 |
| Yearly cost passed to the supplier | USD 23,671 |
| Gap between the two | USD 5,918 |
The currency box changes the label only. Enter amounts in the currency you choose.
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- PDF guide with the formula, a worked example and a checklist of what to enter
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The files open with the example numbers from the page. Type yours over the blue cells in the Excel file. The calculator on this page is free to use without a form.
How the working capital calculator works
The formula
Cash released = yearly spend / 365 x (proposed days - current days). Yearly benefit = cash released x cost of capital.
Stretching payment terms is a common way to improve cash. It is also a transfer: the cash you gain is cash your supplier now has to fund. If their cost of money is higher than yours, the system as a whole loses.
The number helps in both directions. It tells you what a longer term is worth when you ask, and what an early payment discount would cost you. See how a discount compares in the 2/10 net 30 guide.
The example numbers are illustrative and are not benchmarks. Use your own data for any decision.
How to use it with your own data
- Enter the yearly spend with one supplier, or with a group that shares the same terms.
- Set the current and the proposed number of days.
- Set both costs of capital honestly. If you do not know the supplier figure, assume it is higher than yours.
Mistakes that skew the answer
Counting the release every year
Cash released is a one-time gain. Only the financing benefit repeats each year.
Ignoring the supplier side
A supplier that cannot fund the wait may raise prices, ship less or fail. Include the supplier cost in the decision.
Applying one term to every supplier
Large suppliers can absorb longer terms. Small ones may not. Segment before you roll out a change.
What to do with the result
See your overall position in the days payable outstanding calculator and the cash conversion cycle calculator. Write the agreed days into the contract using the payment terms guide, and use the number in the supplier talk, with the contract negotiation guide as backing.
Questions about the working capital calculator
How do longer payment terms improve working capital?
You keep cash for more days before you pay suppliers. The cash stays in the business longer and lowers the need for borrowing.
What is a fair payment term?
There is no universal answer. Many contracts use 30 to 60 days. Some regions or sectors have legal limits on how long a buyer can take.
Should I ask for a discount in return?
If you want longer terms, offering something such as volume, a longer contract or a smaller price rise is a fair exchange.
How does early payment compare?
An early payment discount can be worth more than your cost of capital. Compare the two before choosing.