What 60 day payment terms actually cost

A customer asks to move from 30 days to 60. It arrives as an administrative note from accounts payable, so it gets an administrative answer. It is a commercial decision worth several thousand pounds a year, and it is one of the few that can be worked out exactly.

The number the extension actually moves

Take an account worth £1.2m a year. That is £3,288 of revenue a day. Thirty extra days of credit on it is £98,600 of your cash held in your customer’s business rather than yours, permanently, for as long as the relationship lasts.

It is not a one-off. It is a step change in the working capital the business has to carry from that month onwards, and it does not come back until the days come back down.

If that £98,600 sits on an invoice finance facility at around 9% all in, carrying it costs roughly £8,900 a year. If it sits on an overdraft, use your overdraft rate. If it sits on your own cash, the cost is whatever that cash would otherwise have funded, which for most owner-managed businesses is a hire or a stock position rather than interest.

Work out your own figure in ten minutes

Four inputs, and you already have three of them.

• Annual value of the account. From your sales ledger, last twelve months.
• Extra days requested. Not the headline difference: the difference between what they actually pay today and what they will actually pay after. If they are already running to 41 days on 30 day terms, the honest comparison is 41 against 71.
• Your cost of money. Facility rate, overdraft rate, or your own view of what the cash is worth to you.
• Gross profit on the account. Revenue less the direct cost of serving that customer.

Annual value divided by 365, multiplied by the extra days, gives the cash locked up. Multiply that by your cost of money for the annual cost. Divide by the gross profit for the figure that matters, which is the share of the margin on that account you are being asked to give back.

The month the change lands

The annual cost is the part people eventually work out. The transition is the part that catches them.

In the changeover month, that customer’s old invoices have been paid and the new ones are not due yet. So they pay nothing at all. On a £1.2m account that is roughly £100,000 of receipts that do not arrive in a month where payroll, VAT and every supplier still do.

If two customers move in the same quarter, and they often do because procurement policies change across a group, the transition months can overlap. That is the version that turns a margin question into a payroll question.

Why it lands hardest on a service business

In an agency or a consultancy the work is delivered, and paid for in salaries, weeks before it is invoiced. The staff cost goes out every month whatever happens. So the business is already funding the distance between doing the work and being paid for it, and a terms extension simply widens a gap that is the whole shape of the model.

Add 30 days to the client side and the permanent funding requirement moves by roughly a month of that client’s revenue. On a £1.2m account that is close to £100,000 of additional cash to find, in the same quarter the team is being congratulated on holding on to the contract.

Four answers worth trying, in order

Agreeing is one option of four, and it is the one most owners reach for first because the request does not sound like a negotiation.

• Price it and say so. “We can do 60 days at a 2% uplift, or 30 days at the current rate.” This is the honest version and it converts more often than people expect, because the buyer’s own approval for a price change is usually harder to get than their approval for terms.
• Split the difference on something else. Longer terms in exchange for a longer commitment, a higher minimum, or payment on account for a share of the value up front.
• Stage it. 45 days now, 60 in twelve months if volumes reach an agreed level. This spreads the transition month and gives you a reason to revisit the account.
• Agree, with the funding arranged first. If the account is strategic and the answer is yes, get the facility limit raised before the change starts, not after the first missed month.

What to write down before you sign

Whatever you agree, three things belong in writing, because the cost of the extension doubles quietly when they are missing.

• What 60 days means. From invoice date or from month end? From receipt of invoice or from receipt of a valid purchase order number? “60 days end of month following invoice” is up to 90 days in practice.
• What happens when they are late. Longer terms and loose enforcement are the same problem twice. Statutory interest and a stated escalation point are normal commercial terms, not an act of aggression.
• The review date. Terms that get set once are never revisited. A date in the contract makes the conversation routine.

Where finance actually helps

None of this is hard arithmetic. The reason it does not get done is that nobody owns it: the request lands with the person who has the customer relationship, the cost falls on a bank balance somebody else watches, and the two never meet in the same week.

A working finance function closes that gap in three ordinary ways. It keeps the funding cost of your terms already calculated for the top ten accounts, so an answer takes minutes. It models the transition month before the change is agreed rather than after. And it watches the drift, because the terms on the contract and the days actually taken are two different numbers, and the second one moves without anyone deciding.

The practical point

Do the calculation before you need it. Annual value, extra days, cost of money, gross profit: four numbers, ten minutes, three accounts. Keep the answers somewhere you can find them, because payment terms requests arrive without warning and are usually answered within a day.

If the honest position is that you do not know what your current terms cost, or what your customers actually pay against them, that is the thing to fix first. The negotiation is easy once the number is in front of you.