Improve Working Capital and Supplier Relationships: Why Smarter Payment Terms Are Key

The quest to improve working capital has become a defining priority across industries, especially as inflationary costs, evolving trade agreements and other economic volatility impact balance sheets. 

One of the most immediate levers available to enterprise buyers in this environment is supplier payment terms. Adjusting terms — particularly extending them — can free up significant capital. However, when done without a purposeful, data-informed approach, it can create unintended consequences that ultimately undermine supply chain stability and enterprise growth.

Establishing the appropriate payment terms is about more than just improving days payable outstanding (DPO). It’s about striking a sustainable balance between preserving liquidity and maintaining the financial health of suppliers, especially those that are strategically important to your business or whose vulnerability to extended payment cycles could disrupt your supply chain. This balance is tricky to achieve without clear visibility into existing terms and how they compare to broader industry norms.

Enterprises that take a thoughtful, evidence-based approach to payment term refinement can unlock meaningful working capital gains while building stronger, more resilient supplier relationships. Tools, such as C2FO’s Working Capital Optimization solutions, are designed to help buyers navigate this complexity by benchmarking current terms, recognizing potential and executing strategies that generate value across the supply chain.

When poor visibility leads to missed opportunities

While payment terms hold enormous potential to improve metrics, such as cash flow or DPO, managing internal liquidity goals alongside supplier health can be a major challenge. Extending payment terms may preserve cash on the balance sheet, but it also creates financial strain for suppliers, particularly small to midsize businesses that depend on steady cash flow to operate. This tradeoff has a cascading effect: Stressed suppliers are unable to deliver reliably, invest in capacity or absorb volatility, which in turn jeopardizes the buyer’s supply chain stability.

Most enterprises recognize that compromising supplier health in pursuit of liquidity gains is not a sustainable strategy. In most cases, the issue is not intent, but rather a lack of tools and insights to support more informed, mutually beneficial term changes.

For instance, many term agreements evolve through fragmented negotiations, category-specific policies or one-off exceptions. The result is a patchwork of terms in which similar suppliers may be subject to very different payment conditions with no obvious rationale. This makes it difficult to analyze working capital trends, forecast cash flow or identify which suppliers are suitable candidates for term adjustments.

Most enterprises also lack the external context needed to assess how their terms compare to broader market norms. Without industry benchmarks or visibility into peer practices, organizations are left to operate in a vacuum. What appears to be a reasonable term on paper may, in fact, be unusually aggressive (or overly generous) compared to others in the same supplier’s network. Without comparative analysis, it’s hard to recognize when and where win-win terms are possible.

The consequence is that many enterprises miss opportunities hiding in plain sight. Without clear data to guide decisions, working capital gains go unrealized, or worse, pursued through blunt tactics that risk damaging supplier relationships. To move forward, companies need more than clarity into their own payment terms. They need the ability to contextualize that data against reliable market benchmarks, identify avenues for growth and act on them in a way that facilitates both financial performance and supply chain resilience.

Why setting the right payment terms makes a difference

Establishing optimal payment terms isn’t simply a matter of cash preservation, but can have wide-reaching implications. The right terms serve as a bridge between an enterprise’s financial goals and the operational realities of its supply base. When terms are carefully aligned, buyers can unlock capital to reinvest in growth, fund R&D or buffer against economic uncertainty. Suppliers, in turn, gain the predictability and flexibility they need to manage operations, invest in capacity and remain reliable partners.

Moreover, payment terms signal intent. Fair and transparent practices promote trust and collaboration. That trust, in turn, encourages supplier participation in solutions such as early payment programs, which can deliver more equitable terms compared to exclusionary traditional supply chain finance. It also lays the groundwork for shared initiatives such as sustainability targets, cost-saving projects or collaborative innovation.

This is why data-driven term strategies — informed by industry benchmarks and bolstered by flexible funding models such as early payments — have become an essential tool for enterprise buyers. When executed well, these strategies improve working capital while safeguarding supply chain health and continuity. Partnering with experts, like C2FO’s Working Capital Advisors, helps ensure changes are communicated clearly and collaboratively, reinforcing trust and supplier engagement from the start.

Payment term strategies to improve working capital

Despite the importance of getting payment terms right, most enterprises still lack the tools and information needed to take action without either overlooking opportunities or putting suppliers at a disadvantage. That’s why a strategic approach to term setting that promotes transparency, flexibility and mutual benefit is vital. Here are a few ways your business can make that happen.

Prioritize key suppliers

Not all suppliers contribute the same level of value to your business goals, and payment term strategies should reflect this. Before initiating term renegotiations, companies must segment suppliers based on factors such as total spend, criticality to operations, ease of replacement and supply risk.

Focusing on core partners enables a more tailored and collaborative approach. These businesses may be more open to adjusted terms when conversations are grounded in shared goals, such as inventory efficiency, environmental, social and governance (ESG) initiatives or mutual cost savings. Providing early payment options through solutions such as C2FO’s Dynamic Supplier Finance can help segment key suppliers and offer them additional flexibility without requiring broad changes to baseline payment terms.

Ultimately, targeting these businesses allows enterprise buyers to secure more favorable conditions, such as volume discounts or priority fulfillment, while reinforcing relationships that are essential to business continuity.

Leverage benchmarking data

Benchmarking payment terms against peer organizations and industry norms is a critical enabler of term improvements. However, many enterprises lack the internal data or expertise to assess whether current agreements are competitive, fair or aligned with supplier expectations.

One way to close that knowledge gap is through tools that provide visibility into real-world payment behavior. C2FO’s Working Capital Optimization solutions equip buyers with the insights needed to assess where their terms stand and where there may be room to improve. C2FO’s Working Capital Navigator, for example, draws on anonymized data from $2.5 trillion in annual spend, 1.5 billion invoices per month and 5.5 million suppliers, providing a uniquely comprehensive view into global payment practices.

With this data, finance and procurement teams can identify outliers — terms that are significantly better or less favorable compared to the supplier’s network or suppliers in similar industries — and target those relationships for adjustment. Benchmarking also reveals how terms compare in specific supplier segments based on factors such as business size, location or ESG progress. These findings help organizations adopt more equitable policies across their supplier base and tap into potential partnerships.

Engage experts for term execution

Knowledge is only valuable if it can be translated into action. While benchmarking data is a necessary starting point, scaling a payment term strategy requires operational coordination, change management and supplier communication — areas where many enterprise teams are already stretched thin.

C2FO’s Working Capital Optimization solutions are designed to fill those gaps. In addition to powerful benchmarking tools, enterprises gain access to CPSM®-certified Working Capital Advisors who help shape term policies, segment suppliers and prioritize changes according to potential impact. 

From there, turnkey support ensures smooth execution, including supplier outreach, ERP updates, communications and ongoing performance tracking. As a result, buyers typically see supplier conversion rates of 80% within three to four months, compared to the one to three years often required for internal term management projects.

The outcome is a faster, more effective payment term strategy that improves working capital, boosts supplier participation in early payment programs and delivers a faster return on investment.

Turn payment terms into a competitive advantage

Payment terms aren’t just a lever for preserving cash — they’re a strategic tool for driving long-term value. Enterprises that approach term revisions with the right data, expertise and supplier-first mindset can unlock significant working capital while improving supply chain resilience.

With an expert partner, this balance is achievable. C2FO’s Working Capital Optimization solutions help leading companies benchmark performance, identify opportunities and execute more innovative term strategies that deliver results for both buyers and their suppliers.Call-to-action: Request a demo with a member of C2FO’s Working Capital Optimization team.