What net 60 actually costs you on a program
The terms sit on page 4 of the purchase order and nobody costed them. Net 60 looks like an administrative detail next to a cycle time argument, and on a program at 1,200,000 pieces a year it is worth more than most of the lines people do argue about.
Working capital is the cost that never appears on a statement as a line. It appears as an overdraft, as a facility fee, or as the machine you did not buy because the cash was tied up in somebody else’s inventory.
What net 60 looks like as a cash timeline
Count the days from when money leaves to when money arrives. On an illustrative run of the worked part, material is ordered and paid at 30 day terms, so cash leaves on day 30.
Production takes 10 days and the parts sit 5 days before shipping, so the invoice goes out around day 28 of the cycle. With net 60 terms, payment arrives 60 days after that, which is day 88 from the invoice date and day 118 from the material purchase.
That is 88 days of funded gap on every release. During those days you have paid for material, paid the operators, paid the plater and the heat treater, and received nothing.
Eighty eight days, every release.
The gap is not a one-off. On a program shipping monthly it is a permanent balance, because as one release is paid the next is already funded, and the steady state is roughly 3 months of program cost sitting outside your bank account.
Putting a number on it
Take the annual cost of goods on the program and multiply by the funded fraction of a year and your cost of capital. On the worked part, 1,200,000 pieces at $1.014 is $1,216,800 of annual cost.
Eighty eight days is 24 percent of a year, so the average funded balance is about $293,000. At an illustrative 9 percent cost of capital that is $26,400 a year, which is $0.022 a piece.
Against a margin of $0.396 a piece, working capital is consuming 5.6 percent of it. Not catastrophic, and considerably more than the 3 percent price-down everybody spends November arguing about.
Run the same arithmetic at net 30 and the gap is 58 days, the balance $193,000 and the cost $17,400. At net 90 it is 118 days, $393,000 and $35,400. Each 30 days of terms is worth roughly $9,000 a year on this program, or $0.0075 a piece.
What makes it worse than the arithmetic suggests
Inventory sits inside the gap and it is not free either. Finished goods waiting for a release, work in process between operations, and raw material bought to a mill minimum all extend the funded period beyond the payment terms alone.
The annual usage figure interacts with this. A program quoted at 1,200,000 that releases in 12 monthly lots funds one month at a time. The same program released quarterly funds 3 months at a time, and the balance triples for the same annual volume.
Tooling and PPAP sit at the front of the program and are the worst of it, because that money goes out before any invoice exists at all. A $12,240 submission on 90 day terms is funded for most of a year.
Then there is the customer who pays late. Net 60 in the contract and 78 days in practice is a difference nobody negotiated, and it is worth measuring per customer rather than assuming the terms describe reality.
Measure what they pay, not what they wrote.
Material terms on your own side matter just as much. Buying on 30 day terms and selling on 60 funds the gap yourself. Negotiating 60 day terms with the mill closes most of it, and that is a conversation with your supplier rather than with your customer, which is usually the easier of the 2. The same discipline that puts a material clause in writing applies to the terms attached to it.
How to price it in without making it a target
Do not put working capital on the quote as a line. A line called financing cost is a line a buyer will strike, and it invites a conversation about your balance sheet rather than about the part.
Fold it into the rate or into the margin, and know what it was. The burdened rate is where most of it belongs, because the funding requirement scales with the cost of running the work and that is what the rate already represents.
Price it in, do not itemise it.
Where terms are genuinely unusual, negotiate the terms rather than the price. A customer wanting net 90 can often be moved to net 45, and the ask is easier to make at quote stage than at any point afterwards. Buyers expect a negotiation about terms and are surprised by suppliers who do not have one.
The other route is a discount for early payment. Two percent for payment within 10 days sounds expensive and is worth doing when your cost of capital is high, because 2 percent to accelerate 50 days is an annualised rate you can compare directly against your borrowing.
What to check before you quote a long program
Ask 3 questions about cash before the piece price is finalised. What are the terms, what is the release pattern, and what does this customer actually pay in practice against what the contract says.
The release pattern is the one most often missed and it moves the number most. A program with monthly releases and 30 day terms is a completely different funding proposition from the same annual volume shipped quarterly on 90 day terms, and the piece price should not be the same.
Where a program requires you to hold safety stock, price the holding. Finished goods held against a customer’s schedule is your cash sitting on a shelf, and a contractual stock requirement is a financing commitment with a delivery guarantee attached.
On a long term agreement all of this is fixed for years rather than for one order, which is why the terms deserve as much attention at signature as the price does.
None of this makes long terms unacceptable. It makes them a cost with a number, and a supplier who knows the number can trade it against a price-down request, against a volume commitment, or against terms, which are 3 negotiations rather than one.