Accounts Payable Strategy: Optimizing Vendor Payments
When to pay early, when to extend terms, and how to balance cash flow with relationships.
Key Takeaways
- •Early payment discounts often yield 18-36% annualized returns
- •Extending payment terms is free financing—but preserves relationships strategically
- •AP is a working capital lever, not just a bill-paying function
- •Centralized AP processes improve both cash management and vendor relationships
Accounts payable strategy is often overlooked as a cash flow lever. Most companies pay bills when they arrive without considering the strategic implications. But AP management directly affects your Days Payable Outstanding (DPO) and working capital requirements.
Smart AP management isn't about paying as late as possible—it's about making intentional decisions that balance cash flow, vendor relationships, and discount economics.
The Math on Early Payment Discounts
Many vendors offer early payment discounts. Understanding the annualized return helps you decide whether to take them.
Common Discount Terms
2/10 Net 30
Take 2% discount by paying in 10 days, or full amount due in 30 days
Annualized return: 2% / (20/365) = 36.5%
1/10 Net 30
Take 1% discount by paying in 10 days
Annualized return: 1% / (20/365) = 18.25%
2/10 Net 45
Take 2% discount by paying in 10 days, or full amount due in 45 days
Annualized return: 2% / (35/365) = 20.9%
The Decision Rule
If the annualized discount return exceeds your cost of capital (including credit line rates), take the discount. For most companies, any discount over 1/10 Net 30 is worth taking if you have access to capital.
When to Extend Payment Terms
Extending payment terms is essentially free financing from your suppliers. But it must be balanced against relationship impacts and supplier economics.
Good Candidates for Term Extension
- Large suppliers with strong balance sheets
- Suppliers where you represent significant volume
- Commoditized products with multiple alternatives
- When you can offer volume commitments in exchange
Protect These Relationships
- Small or critical suppliers who depend on cash flow
- Unique or hard-to-replace vendors
- Strategic partners where relationship matters
- Suppliers with quality or service advantages
Negotiation Approaches
- Bundle the ask: Request extended terms as part of a larger negotiation (volume, contract extension)
- Offer something: Longer commitment, larger orders, or early visibility into demand
- Test new suppliers: Some suppliers offer better terms to win business
- Time it right: Negotiate at contract renewal, not when you're behind on payments
Strategic Payment Timing
Beyond terms, how you time payments within terms affects both cash flow and relationships.
Payment Timing Strategies
Weekly payment runs
Process payments weekly rather than as invoices arrive. This concentrates cash outflows on predictable days and reduces processing effort.
Month-end timing
For monthly reporting, you may want to time payments to optimize month-end cash positions. Just don't let reporting drive late payments.
Pay on due date, not before
Unless taking a discount, paying early provides no benefit. Use the full term to preserve cash float.
The Late Payment Trap
Chronically paying late destroys relationships, generates late fees, and can affect your credit rating. If you can't pay on time, communicate proactively—most suppliers prefer a conversation to a surprise.
AP Process Best Practices
Good AP processes enable strategic payment decisions while maintaining vendor relationships.
- Centralize AP: All invoices flow through one process with clear approval workflows
- Match to POs: Three-way matching (PO, receipt, invoice) prevents payment errors
- Track discount capture: Measure what percentage of available discounts you're actually taking
- Monitor DPO: Track Days Payable Outstanding by vendor category
- Review vendor terms annually: Terms should be negotiated, not accepted as default
DPO Impact Example
A company with $12M in annual COGS and 30-day DPO has ~$1M in average AP.
Extending terms to 45 days increases AP to ~$1.5M—freeing $500K in working capital without borrowing or selling equity.
Vendor Payment Segmentation
Not all vendors deserve the same treatment. Segment your vendor base and apply appropriate strategies to each.
| Segment | Characteristics | Payment Strategy |
|---|---|---|
| Strategic Partners | Critical, hard to replace, relationship matters | Pay on time, take discounts, invest in relationship |
| Volume Suppliers | Large spend, alternatives exist | Negotiate terms aggressively, leverage volume |
| Commodity Vendors | Easily replaceable, price-driven | Maximize terms, switch for better deals |
| Small/Local | Small businesses, cash-constrained | Pay promptly—your delay hurts them disproportionately |
Related Resources
Cash Flow Management Guide
Complete cash flow overview
Cash Conversion Cycle
Understanding working capital metrics
Need Help Optimizing AP Strategy?
Eagle Rock CFO helps companies optimize working capital through strategic AP management. Let's discuss your vendor payment strategy.
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