Is Your “Net 60” Payment Term Killing Your Next Breakthrough Product?
In the boardrooms of the Fortune 500, a specific mantra has held sway for decades: “Cash is King.” The directive handed down from the CFO to the Accounts Payable (AP) department is usually simple and unyielding: maximize working capital. In practice, this often translates to extending Days Payable Outstanding (DPO). If we used to pay suppliers in 30 days, let’s move them to 45. If they accept 45, let’s push for 60, or even 90.
On a balance sheet, this looks like brilliance. You are effectively getting a 0% interest loan from your vendors. You keep the cash in your bank account longer, earning interest or funding your own operations, while the supplier waits. It seems like a victimless arbitrage, a standard lever of corporate finance.
But in the complex, interconnected ecosystem of modern commerce, there is no such thing as a free lunch. While you may be saving pennies on the cost of capital, you might be costing yourself dollars on the cost of innovation. The aggressive extension of payment terms is not just a financial squeeze; it is an innovation killer that is slowly strangling your supply chain’s ability to help you compete.
The Economics of the Squeeze
To understand why this happens, we have to look at the economic reality of your suppliers. While your enterprise might be a massive entity with access to cheap credit (perhaps borrowing at 4% or 5%), many of your suppliers are Small to Mid-sized Enterprises (SMEs).
When you force an SME to wait 90 days for payment, you are starving them of operating cash. To survive that gap, they often have to borrow money. But unlike you, they don’t get prime rates. They might be borrowing from factors or lines of credit at 10%, 12%, or 15%.
This creates a massive inefficiency in the supply chain. You are forcing the party with the highest cost of capital (the small supplier) to finance the operations of the party with the lowest cost of capital (you).
The Innovation Tax
But the damage goes beyond interest rates. When a supplier is squeezed for cash, they enter survival mode. They stop hiring. They defer maintenance. And, most critically, they cut discretionary spending.
In a manufacturing or tech-driven supply chain, “discretionary spending” is often a synonym for Research & Development (R&D).
If your supplier is worrying about making payroll because your invoice is stuck in a 60-day approval cycle, they are not investing in the new machinery that would make your parts lighter. They are not hiring the engineers who could redesign your widget to be 20% more energy-efficient. They are not experimenting with the sustainable materials you put in your annual ESG report.
You might be winning the battle for working capital, but you are losing the war for product superiority. Your competitors, who might treat their suppliers as true partners with fair payment terms, are getting the “A-Team” effort. They get the first look at new prototypes. You get the “B-Team” effort—the standard, off-the-shelf components—because you have proven that you don’t value the financial health of the partnership.
The “Quality Fade” Phenomenon
There is another, darker side to this equation: Quality Fade. This is the subtle, gradual decline in product quality over time as a supplier tries to claw back margin.
If you insist on rock-bottom prices and 90-day payment terms, the supplier has to make the math work somehow. Maybe they switch to a slightly cheaper raw material. Maybe they reduce the frequency of quality control checks. Maybe they replace a metal internal gear with a plastic one.
These changes are often too small to be caught immediately by your incoming inspection, but they manifest later as increased warranty claims, customer dissatisfaction, and brand erosion. You saved cash flow in Q1, only to pay for a massive recall in Q4. The AP policy that looked smart on a spreadsheet resulted in a product failure in the real world.
Turning AP into a Strategic Engine
So, is the solution to simply pay everyone immediately and ruin your own working capital? No. The solution is optionality.
In a manual, paper-based AP environment, you are slow by default. You pay in 60 days because it takes 55 days just to process the invoice, match it to the PO, route it for approval, and cut the check. You have no strategic choice.
In a modern, digitized finance function, you have speed. And speed gives you leverage.
If you can approve an invoice in 3 days, you now have 57 days of “decision space” (if the term is Net 60). You can choose to:
- Pay on Day 60: Keep the cash, if that’s the strategic priority.
- Pay on Day 5: In exchange for a 2% discount (Dynamic Discounting). This yields a risk-free return that beats almost any market investment.
- Offer Supply Chain Finance: Use your bank’s credit rating to let the supplier get paid early by a third party, while you still pay on Day 60.
This approach creates a “win-win.” You preserve your working capital metrics, but you ensure your suppliers have the liquidity they need to invest in the innovation you crave.
The Technological Bridge
The barrier to this strategic utopia is rarely intent; it is friction. CFOs want to capture early payment discounts, and they want healthy suppliers. But they are held back by the sheer gravity of manual processing—the lost emails, the disputed line items, the data entry errors.
You cannot execute a dynamic financial strategy on a static, manual foundation. You need visibility. You need to know, in real-time, exactly what liabilities are accrued, which vendors are strategic, and where the opportunities for arbitrage exist.
This is where the technology stack becomes the differentiator. Implementing a robust platform like Serrala AP Automation isn’t just about saving the time of AP clerks (though it does that, too). It is about giving the CFO the dashboard and the controls to treat the supply chain as a financial portfolio. It provides the velocity required to transform the AP function from a back-office bottleneck into a front-office competitive advantage.
Conclusion
The era of treating suppliers like adversaries is ending. In a world of fragile supply chains and rapid technological change, your vendors are your lifeline. If you starve them, you starve yourself.
It is time to rethink the “Net 60” default. By removing the friction from your payment cycle, you can stop imposing an innovation tax on your partners and start investing in a resilient, forward-thinking supply chain that drives value for everyone. Don’t let your pursuit of short-term cash flow kill your long-term future.
