Given the possibility that 120 days credit may become the ‘norm’, and the likelihood that retailers may offer ‘easy invoice’ arrangements for suppliers in need of cash, it may be useful to explore the financial options in advance…

In other words, when the choice amounts to 120 days net, or ‘early’ payment @ x% off invoice, what financing are we talking about?

Annual invoiced sales to the customer/annum = £9.5m

Customer wants to pay in 120 days

Supplier wants to be paid in 5 days (after all, little point in going back to your current 40 days if you need money now)

i.e. a 115-day reduction in payment period

At 120 days, customer pays 3 times per year i.e. 365/120

At 5 days, supplier wants to be paid 73 times per year i.e. 365/5

Amount customer owes when paying in 120 days

= £9.5m/3 = £3.17m

Amount customer owes when paying in 5 days

= £9.5m/73 = £0.13m

i.e. Cashflow saving = £3.17m - £0.13m

= £3.04m

Say the cost of borrowing is 10% interest per year

Then the cost of borrowing £3.04m for a year

= £0.304m

Which is equivalent to 3.2% of supplier sales to customer

i.e. £0.304m/£9.5m x 100%

Then any extra discount above 3.2% is more beneficial to the customer than investing the money at 10%.

In other words, when the choice amounts to 120 days net, or ‘early’ payment @ x% off invoice, what financing are we talking about?

**Assumptions:**Annual invoiced sales to the customer/annum = £9.5m

Customer wants to pay in 120 days

Supplier wants to be paid in 5 days (after all, little point in going back to your current 40 days if you need money now)

i.e. a 115-day reduction in payment period

At 120 days, customer pays 3 times per year i.e. 365/120

At 5 days, supplier wants to be paid 73 times per year i.e. 365/5

Amount customer owes when paying in 120 days

= £9.5m/3 = £3.17m

Amount customer owes when paying in 5 days

= £9.5m/73 = £0.13m

i.e. Cashflow saving = £3.17m - £0.13m

= £3.04m

Say the cost of borrowing is 10% interest per year

Then the cost of borrowing £3.04m for a year

= £0.304m

Which is equivalent to 3.2% of supplier sales to customer

i.e. £0.304m/£9.5m x 100%

Then any extra discount above 3.2% is more beneficial to the customer than investing the money at 10%.

**A 3.2% discount off invoice seems reasonable?***If the above supplier is making a Net Profit margin of 5%, then the £0.304m discount represents incremental sales of £6.08m, a mere 64% increase in sales to the customer, to recover the discount…***NB. Best check the above application to your latest annual results with Finance, before leaving the building…**