The Purchase function controls the cash of a company to a large extent as it is responsible for both the direct and indirect spent of the company. These are numerous ways by which the purchase professionals can add value to the company but I shall limit the scope of this article to the Terms of Payment (TOP) that is the prerogative of the purchase department.
Terms of Payment governs the mode through which the payment to the supplier or service provider shall be made and the term and conditions related to it. All suppliers or service providers would like to receive the payment into the most convenient form as soon as the product or service is delivered. This helps them bring in cash to the business. Likewise most purchase professionals would like to make the payment as late as possible because it helps them bring in free cash to the business. The longer the payment is deferred the more working capital the business has. In most professionally run companies the Terms of Payment is a Key Performance Indicator for the Purchase Professionals and they are evaluated based on it.
Purchase professionals must be extra careful while negotiating the Terms of payments as the quality and of the product or the service may be adversely impacted by a very demanding TOP. The Greater danger is of rendering yourself and your company unattractive to the supplier. Before entering into a negotiation on TOP it's very important to have a thorough idea of the industry practices, the thumb rules, the product itself and the interest levels of the suppliers. This helps in having a fair understanding of the negotiation power that you enjoy and entering in a fruitful negotiation which leaves both the parties happy and more importantly you bringing in cash to your business.