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  • About Us
    • Nick Setchell – RealTime CEO
    • Vistage & TEC WorkshopsNick Setchell has been working with Vistage, the world’s largest CEO organization, since 2001.
    • NewsSee what’s happening with RealTime CEO.
    • Economic Update Report
    • Contact UsReach out to us. If you’re interested in booking Nick to give a keynote address or workshop at your conference, please include the date and location.
  • Concepts
    • Fiscal Focus Financial Statement AnalysisUnlock the hidden numbers in your P&L and balance sheet to see how you’re performing in 11 vital metrics.
    • Should We? / Can We?View, in real time, the actual financial impact of the hundreds of business decisions your team makes every month.
    • 24 Month Rolling ForecastingBlend your trailing twelve months with a rolling 12-month forecast to get a complete financial picture of your business.
    • J Curve ManagementTrack the number of investments you’re undertaking, the 3 phases of each, and the 5 rules for managing them.
    • Return on Operations – ROOView your return on operations percentage — your ROO % — the most powerful number to measure business success.
    • CEO Performance AnalysisBenchmark your performance as a private-company CEO against others in your industry.
  • Resource Center
  • Blog
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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?

Lever Impact – Scenario 1 Impact – Scenario 2
Price – –
Volume – –
DC – Wages – –
DC – Other -720 Enter various amounts until a Yes/Yes decision is shown
IDC – Wages – –
IDC – Other – –
AR Days – –
Inventory Days – –
AP Days -22 -22
Fixed Assets – –

 

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.



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