After nearly a decade of relative obscurity, transaction payment terms are making a comeback on the business scene. Buyers—and in many cases, suppliers—are taking a new look at how payment terms and conditions can affect balance sheets.

Indeed, 70% of respondents to PURCHASING's survey say that in the past year they have negotiated or renegotiated more favorable payment terms on the goods and services they purchase for their firms.

Typical, of the new interest in transaction terms and conditions is that of a commodity manager for a large household appliance manufacturer. He notes that as the pace of business expansion and sales volumes continues to weaken, he's being urged to be "more creative" in cutting costs out of transactions themselves. "Terms of payment have become especially important to us in improving cash flow," he says.

Barbara Roberts, purchasing manager for Deutsch Metal Components, Gardena, Calif., sees the objective of her company's increased attention to payment terms as twofold: "(1) to roll capital faster and (2) give suppliers more choices regarding payment terms." The increase in choices, she explains, shortens due dates, which in turn, "benefits both company and supplier through discounts."

Many buyers report experiences similar to those of Gerald Leach, purchasing manager at David Clark Co., Worcester, Mass. While he has been successful in negotiating only a handful of improved discount terms of payment, most have been "worth the effort." He notes that a number of suppliers have changed discount terms (mostly from 1% or 2% for cash payment in 10 days) to net 30 (payment of full amount within 30 days). Leach suspects that supplier acceptance of the change is at least partially a reflection of their need to receive payments quickly.

Ideally, most survey respondents indicate that they start out with an objective of winning payment terms that call for a discount of 2% for payment in 10 days. Most, however, admit that they often settle for considerably less. Many, in fact, report experiences that fall closer to those of the plant purchasing manager for a North Carolina furniture maker. "We negotiated with all our suppliers for cash discounts" (1% or 2% for full payment within 10 days). "Some simply could not offer the discounts we wanted, but still offered to extend net payment terms (60, 90, 120 days). Others offered terms that split payments into monthly pieces. Our feeling is that something is always better than nothing, so we negotiated the best terms we thought we could get."

Closer attention to prompt payment has not been solely a concern of buyers. Slightly more than 30% of those reporting changes in payment terms say their suppliers have initiated the changes. The purchasing manager for an Atlanta distributor, for instance, says that his company reinstated strict cash payment discount terms after it was determined that a number of its customers were taking discounts well after the payment date expired.

For many companies, strict reinforcement of payment terms has turned into an important savings initiative. "Just as many companies are trying to reduce inventories to free up cash, so are we," explains Elizabeth Emmett, vice president purchasing, DelStar Technologies, Middletown, Del. "In fact, the combined advantages of better terms and reduced inventories has made it possible for us to realize some of our financial goals faster. It has also given us money to put toward cap projects and resulted in significant cost advantages." That's because many of the materials used by DelStar are bought in railcar quantities. "Taking advantage of '2%, net 30' realizes a savings of approximately $4,000 per railcar, per month," says Emmett.

B.M. (Bud) Henry, director of purchasing at Tindall, Corp., Spartanburg, S.C., notes that his company has set up a program in which it makes payments to suppliers every week. This allows the company to "honestly pay our suppliers within 10 days after receipt of invoice for materials/services, and take our earned 2% cash discount."

Tindall's Henry also points out that by taking advantage of improved terms of payment his company has been able to reduce costs and "channel business to suppliers that provide discounts." He notes that discount payments from suppliers increased 24% in 2001.

For many purchasing executives it's all part of the negotiating process. Says the materials manager for a controls company in Nashville, "If we take early receipt of inventory, we usually push back on payment terms—60 days instead of 30. On the other hand, some of our suppliers are continuously and quietly trying to eliminate our 2% discount for cash."

Frank Mofford, director of purchasing at Crawford Sprinkler Co., Hickory, N.C., makes terms an important part of overall procurement strategy. "I tend to gravitate toward suppliers who honor my proposals on terms—and as a small business every little savings helps."

In most cases, according to PURCHASING's survey, changes in payment terms have entailed activity in one or more of the following areas:

• Discounts for cash. More companies than ever seem to be pressing for cash discounts for prompt payment. In some cases they are matched by suppliers aiming at collecting penalties for late payment. In the negotiation process many suppliers have been pushing for strict construction of cash payment terms.
• Closer enforcement of due dates. Typically, invoices are payable net 30—that is, within 30 days of payment date on invoice. Many changes in this area focus on extending net due dates. Another important change in this area involves companies paying bills twice a month (often on the 10th and 25th of each month).
• Enforcement of cash and net due penalties. Many changes in both directions, but probably more instances of stretched payment terms favoring those doing the buying. A few cases of COD terms only, but these mostly involve MRO goods or low volume/high value items. Some significant stretching of payment due dates to 60, 90, even 120 days.
• Changes in penalties (up or down) for late payment. In some cases suppliers are requiring prepayment and others are refusing to accept the purchase orders of companies with dubious payment histories.

One area that would seem to be a natural in the search for better payment terms is the procurement charge card. Many companies have been using them since the mid-1990s. What's more, many buyers and suppliers also express favorable opinions of cards in terms of convenience, potential for paperwork reduction, and assured quick payment.

Appearances, however, can be deceiving. Follow up phone interviews with participants in PURCHASING's survey turn up considerably less enthusiasm for cards. In fact, only 25% of those participating in PURCHASING's survey have increased card use recently. A fair number of purchasing managers say they are actually cutting back on p-card use in recent months.

In any case, what appears to be happening is that cash flow concerns are at a point where all purchases are under close scrutiny and procurement cards are often suspect. "The trouble," says the senior buyer for a Utah aerospace company, is that "procurement card companies have never done a good job of selling to industrial users.... Right now our CFO is looking at all purchases...and he considers procurement cards to be retail vehicles." Use of the card in his company is now restricted to off-the-shelf items." Many other purchasing professionals indicate that they seldom use purchasing cards to pay for production goods.

The reason for this apparent lack of enthusiasm is not new, says Gavin Brown, general managing partner, the Traxion Group, Indianapolis. According to Brown, he and his partners have been studying tightness in the credit market for some time and are developing a new payment plan that, he claims, will satisfy many of the procurement card's weaknesses and deliver cost advantages to both buyers and suppliers.

Working with Bank of America and the Alliance Group procurement, Brown and his associates are developing a plan under which the buyer gets a 1.5% discount for cash plus a discount of 0.7% for using a procurement card. In total, the buyer gets a 2.2% discount. The supplier, meanwhile, gets guaranteed payment of its invoice within 48 hours. Processing fees for both are said to be minimal.

Unlike typical procurement cards currently in use, Brown says Traxion's card will target volume purchases and new business. Borrowing an idea from the telecommunications industry, Brown's group will offer steep rebates for volume. Unlike most of the cards in use today, he says, "we want to make it attractive to users in terms of volume." In the past, he says, procurement cards were usually sold on the basis of saving money on things like reduced processing costs. Traxion will focus on volume leverage.