There is no one answer to this question. It depends very much on the strategy your company is pursuing, the cash flow situation and the credit rating of your company.
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 the way you design your contracts with your vendors and your clients in regards to payment terms. And your efficient collection process is another part of this equation.
Payment Terms: This leads to the second factor to keep in mind: your vendors are usually willing to give you more favourable payment terms, if you have a history of paying on time (with some grace days).
The next factor would be 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 software, that you implement to offer your vendors to get paid early for a auctionable discount. Though that means that 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% (see this paper from Aberdeen Group, Page 7). Without having the invoice ready for payment within a few days, chances are slim that you can take out the early payment discount.
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 here 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 round: paying on time reflects positively in your credit rating, which helps your vendor to make a favourable decision for you regarding the payment terms.
Liquidity: Obviously 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 to predict your liquidity in the future. And 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 in average 7 days before you receive it, and then it needs to be still 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 have the perfect formula when to pay an invoice. Also, Check out NetChain Squared’s payment date recommendation engine, which takes into account all the above (and more) to recommend the payment date, which will have the greatest financial impact on your company.
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