Procurement professionals can add value to the organization not only by reducing the cost dimension, but also the non-cost dimension. Payment terms is one such non-cost dimension that a procurement professionals focus on. Procurement functions being largely under the direct control of CFO, tends to direct their efforts to obtain extended credit periods. The objective is typically to match the Days Payable Outstanding (DPO) with the Days Sales Outstanding (DSO).
In the effort to match the cash cycle time tied up customer payment terms to that of supplier payment terms, the procurement professionals fail to harness the benefits of discounts which the suppliers would be more than willing to provide for an early payment. In this economic downturn, organizations faced with credit constraints are more than happy to offer a discount term to improve the cash flow.
The discount terms might not be always lucrative, but it is an option which the procurement professionals can opt for. The finance department can decide on whether to utilize the discount or pay on a net basis considering the financial objectives and comparing the discount with the cost of capital. The organization will be benefited by a lower working capital requirement.
