When Is The Best Time To Pay Your Invoices?
There is no one answer to this question. It depends very much on your strategy, the cash flow situation and your credit rating.
DPO vs. DSO – a cash flow consideration: First and foremost, you do not want to pay your vendors quicker than your customers pay you. This can be seen when comparing your DSO and your DPO – your DPO should be higher than your DSO. This can be achieved by how you design your contracts payment terms with your vendors and your clients, as well as your collection process efficiency.
Payment Terms: Your vendors are usually willing to give more favorable payment terms if you have a history of paying on time.
Credit Rating: Major credit rating agencies have their own programs to review how much on time a company is paying. One of the best known programs is D&B’s Global Trade Program, where your vendors are contributing customer payment patterns. Paying constantly late can therefore hurt your credit standing and your overall reputation. Or the other way around: paying on time reflects positively in your credit rating, which helps your vendor to make a favorable decision for you regarding the payment terms.
Early payment discounts: There are two ways to benefit from early payment discounts: either a fixed agreement with the vendor that is already baked into the contract, or a dynamic discounting calculation to offer your vendors to get paid early. Though that means you need to be able to process an invoice and have it ready for payment much quicker than the 16 days average, or even worse, the 35 days for the bottom 30%. Without having the invoice ready for payment within a few days, chances are slim that you can take out the early payment discount.
Liquidity: Your ability to pay an invoice on time is another determining factor. A solid collection process and cash/liquidity forecasting based on historical payment patterns of your customers can help you predict your liquidity in the future. You have to factor in seasonality, month, quarter and year end activities of your customers – as much as their way of paying you: a check still needs an average 7 days before you receive it, and it still needs to be cashed.
The more automated the forecasting process, the more precise it is.
Conclusion: Automate your processes from invoice processing to billing & collection to liquidity forecasting, add your overall strategy and an automated forecasting model for your liquidity, and you will have the ability to optimize when to pay an invoice.
How we can help: Juno Payments offers payment date recommendation engine as part of our invoice automation solution. It takes into account all of the above plus more to recommend the optimal payment date, which will have the greatest financial impact on your company. We look forward to working with you to optimize your AP/AR operations.