How to negotiate payment terms

business.gov.au treats supplier terms and prices as open to negotiation, because they decide how much leaves the business and when. Its example is a move from 30 to 60 days to pay. It also suggests committing to regular orders in return for a bulk discount.

Trade credit, as business.gov.au calls it, lets a business delay paying for goods it has already received. It notes that trade credit is widely offered, that terms differ between suppliers, and that a supplier may offer it only to businesses it trusts. That makes your own payment record part of your bargaining position.

• Your spend with the supplier over the past year, from your supplier account or bills.
• Your payment record: whether you have paid on time, and any disputes.
• Your cash flow forecast, showing which months are tight and how much a change would help.
• What other suppliers offer, since business.gov.au suggests comparing suppliers and asking about discounts and payment options.
• What you can offer in return, such as regular orders, larger orders, a longer agreement or reliable payment on the new due date.

Days to pay is only one lever. Others include:

• when the clock starts, such as from the invoice date or from the end of the month
• a discount for paying early
• a smaller deposit, or none, on regular orders
• instalments for a large purchase. business.gov.au suggests arranging a payment plan for larger costs
• a higher credit limit with the supplier
• a lower price in return for a committed volume.

In July the business still pays June's bill on the old terms. In August nothing is due, because July's bill now falls due in September. From then on, one month's purchases are paid each month, as before. The benefit is a single month's purchases kept in the bank for as long as the new terms last. Profit doesn't change, because the business buys and pays the same amounts.

A supplier may offer a discount for paying within a short period. Compare what the discount takes off the bill with what paying early does to your cash in that month.

If the forecast shows the cash can go out early without leaving a later bill short, the discount reduces what you pay. If paying early would mean leaning on an overdraft or paying another supplier late, the discount may cost more than it returns. Ask your accountant how discounts you take should be recorded.

1. Ask the person who can approve credit terms, not only your usual sales contact.
2. Explain what you want and why, with a specific request rather than a general one.
3. Offer what you can give in return.
4. Listen to what the supplier needs. An outcome that works for both sides keeps the relationship going.
5. Confirm what was agreed in writing. business.gov.au recommends a written contract that covers price and payment terms, and suggests working out a contract's effect on your finances before you sign.

Negotiating is different when a bill is already hard to meet. business.gov.au suggests contacting the businesses you owe early, explaining your situation and asking about hardship arrangements, a later due date, paying part now or paying in instalments. Keep a record of each conversation.

Delaying supplier payments is on business.gov.au's list of signs that cash flow may be under pressure, so agree any delay with the supplier rather than simply paying late.

• Change the supplier's payment terms in your accounting records, so new bills get the right due date.
• Update the supplier file with the agreed terms, the date and who agreed them.
• Move the affected payments in your cash flow forecast.
• Pay on the new due date.