How to Calculate Savings Relating to Changing the Vendor Payment Terms

In business there are always ways to cut costs. One of the best places to look for savings is in your payment terms, which could be costing you more than you realize. With some careful analysis and planning, you could save your company money just by paying your bills a little faster and/or according to the terms specified in the original contract. The challenge is understanding what the terms mean and then comparing them against possible scenarios.

Determine your current vendor payment terms.These will be clearly outlined in the terms and conditions of your contract. The most common payment terms include discounts or possible savings associated with paying your bill within 15, 30, 60 and 90 days.

Determine the current payment terms. This is the average amount of time you pay your bills and is usually determined by the amount of the payment or other policy set forward in the accounts payable department. Let's say that payments are currently made within 45 days.

Determine the percentage difference in the discount. If you are paying your bills within 15 days, at .5 percent, as opposed to 30 days, at .3 percent, the difference is .2 percent.

Calculate the savings related to changing vendor terms from 30 to 15 days. Multiply the payment to the vendor by the difference calculated in Step 3. If the payment to the vendor is $10,000 the calculation is $10,000 multiplied by .0002 or $2.

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About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.