Payment Terms
Definition:
Payment terms refer to the conditions under which a buyer agrees to pay a supplier for goods or services purchased. These terms specify the amount of time the buyer has to pay the invoice and may include discounts for early payment or penalties for late payment. Net payment terms, or net terms, indicate the number of days the buyer has to pay the full invoice amount without incurring any additional charges.
Example:
Acme Corporation negotiates payment terms with its suppliers as part of the contract agreement. For a raw material supplier, the agreed payment terms are "Net 30," meaning that Acme Corporation has 30 days from the invoice date to pay the full amount without any discount or penalty. Another supplier offers "2/10 Net 30" terms, which means that Acme Corporation can receive a 2% discount if the invoice is paid within 10 days, or pay the full amount within 30 days.
Why are Payment Terms important to Procurement teams?
Payment terms are an essential aspect of supplier relationships and can have a significant impact on an organization's cash flow and working capital management. Procurement teams must carefully negotiate payment terms that balance the need for favorable cash flow with the importance of maintaining strong supplier relationships. Longer payment terms can improve cash flow by allowing the organization to hold onto funds for an extended period, while shorter terms or early payment discounts can be leveraged to reduce overall spend. Procurement teams must also ensure that agreed payment terms are clearly communicated to accounts payable and that invoices are processed and paid in accordance with these terms to avoid any disputes or disruptions in supply.