Supplier Payments

This is the screen where you can describe the details of how you will pay your suppliers.

Many small companies fail to plan their cash flow. Imagine two companies, Company A and Company B, which are in identical businesses with identical revenues of $10M per year and annual profits of $1.5M. The only difference is that Company A must pay its suppliers immediately and its customers pay their bills within 30 days of purchasing products and receiving invoices from the company. Meanwhile, Company B must pay its suppliers within 30 days of receiving supplies and its customers pay their bills online immediately upon ordering. Due to these cash flow differences, Company A could require more than $1M more funding than Company B.

Fundamental to the success of companies is their cash strategies. You need to specify values for two key assumptions on this screen:

1. What are A/P at the beginning of the current (i.e., at the beginning of the modeling period) fiscal year? This is used just to get the first month's A/P on the balance sheet correct. If you are starting Offtoa at the very beginning of your company's existence, this will be zero.
2. Average days outstanding for your payments to vendors/suppliers (aka A/P). On average, how many days will your vendors and/or suppliers allow you to pay them? When computing this value, use a weighted average, weighted by the dollars paid. So, for example, if in a typical month you purchase $50,000 from retail stores, which demand cash payments immediately (net zero), $20,000 from a component supplier with whom you arranged “net 30” terms, and $20,000 from another vendor with whom you arranged “net 60” terms, you should state the assumption as 20 days, i.e.,

($50,000 × 0 + $20,000 × 30 + $20,000 × 60) / ($50,000 + $20,000 + $20,000) = 20.

Here is what the screen looks like:

Can my average days outstanding for payments to vendors/suppliers ever be negative?

What techniques exist to lengthen average days outstanding for payments to vendors/suppliers?