Payment Terms Extension Working Capital Calculator
Longer payment terms are free cash, unless the supplier raises the price to compensate. This calculator values the extra days at your cost of capital and tells you the premium at which the deal breaks even.
Your numbers
Borrowing rate or WACC your finance team uses.
Any price increase accepted in exchange for the longer term.
Your results
Does not model supplier financing cost, supply-chain finance programs or early payment discounts you may lose. Confirm legal limits on payment terms in your jurisdiction.
Financing benefit and net benefit vs proposed term
Sweeps Proposed payment term from 0 to 180, holding your other inputs fixed.
Payables and terms analysis from your ERP
Optional: we can review actual days paid versus contract terms across your supplier base.
Optional. The tool and every export work without this. No spam.
How to use it
Enter annual spend with the supplier, the current and proposed terms in days, and your cost of capital. If the supplier wants a price increase for the longer term, enter it as a premium. The tool computes the one-time cash released, the annual financing benefit, and the net benefit after the premium. The chart sweeps the proposed term from zero to 180 days so you can see how value grows linearly with days while the premium cost stays fixed.
The method
Daily spend is annual spend divided by 365. Cash released is daily spend times the extra days, which equals the rise in average accounts payable. The financing benefit is that cash times your cost of capital. Breakeven premium is the financing benefit divided by annual spend. At 9 percent cost of capital, each extra 30 days is worth roughly 0.74 percent of spend, which is a quick rule of thumb for evaluating asks.
- Cash released = spend / 365 x extra days
- Benefit = cash released x cost of capital
- Breakeven premium = benefit / spend
Reading the result
If the supplier asks for a premium below the breakeven, the extension pays; above it, you are better off paying earlier. Compare also with an early payment discount: two percent for paying ten days early instead of net 30 has an annualized return near 36 percent, which beats almost any cost of capital. In that case, shortening the term and taking the discount may win over extending the term.
Common mistakes
Do not treat released cash as a recurring annual saving: the balance is released once, and only its financing return recurs. Watch for terms measured from invoice date versus receipt date, which can differ by weeks. Check the payment run schedule too, since a Net 60 term paid in a weekly run on day 63 changes the math. ERP payment terms and payment run configuration should be reviewed together.
Frequently Asked Questions
Is released cash a saving?
It is a one-time improvement in working capital. The recurring saving is only the financing return on that cash, such as interest avoided or earned. Report both separately to finance.
What cost of capital should I use?
Use the figure your finance team applies to working capital decisions. A short-term borrowing rate is common, and a weighted average cost of capital is used when funding is mixed.
Does this hurt the supplier?
Yes, it shifts financing cost to them, which is why they ask for a premium. Check supplier health first, and consider supply-chain finance if the supplier is small and strategic.
What about early payment discounts?
Compare the annualized return of the discount with your cost of capital. A discount such as 2/10 net 30 is usually worth taking if you have the cash.
If you need payables by supplier and actual days paid pulled from your ERP into this analysis, Netray can set that up read-only.
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