Crystal Ball Example: Is it worth paying our suppliers faster to receive a settlement discount?

Is it worth paying our suppliers faster to receive a settlement discount?

Our major material suppliers offer a 4% settlement discount if we pay within 45 days.  Our current AP days are 67. Is it worth paying sooner to take advantage of this discount?

Assumptions used in this example:

• Actual Material Costs are $18.008m in the 12 months rolling to Feb 22. $18.008m x 4% = $720k.  So we will save $720k by paying this within 45 days.
• AP Days are currently 67
• Scenario 2 is working out what discount we would have to receive to make it worthwhile

Which levers will be affected?

Scenario 1: 4% discount to pay in 45 days

Enter -720 (k) in Direct Costs Other $000, and -22 in the AP Days.  Note the variability is set to the default of 90% but it has no impact because we are not modeling a volume change (variability is only related to volume changes).

This is a Yes/No decision.  ROO increases slightly but operational cash flow would decrease.

Scenario 2: What discount would we have to receive to make it worthwhile paying in 45 days instead of 67?

Enter various amounts (k) in Direct Costs Other $000, and -22 in the AP Days until you find a point where it is a Yes/Yes decision.  Note the variability is set to the default of 90% but it has no impact because we are not modeling a volume change (variability is only related to volume changes).

We would have to save $1.4m which is 7.8% to make it worthwhile paying in 45 days.