For most of my career I treated paying annually in advance as an easy win. Software suppliers offer a discount for it, usually five to ten percent, and a year's payment up front is simpler to process than twelve. When I renegotiated our larger contracts, the annual upfront option was almost always the one I chose, and I reported the discounts as savings.
Last year our finance director asked me to explain a spike in our cash outgoings every spring. Eleven of our biggest software renewals fell between April and June, because that was when the original contracts had been signed or co-termed, and all eleven were paid a year ahead. Together they came to about one point four million pounds in ten weeks.
That spring was a difficult one for cash. Our largest customers pay us at sixty days, two had moved to ninety, and the company was drawing on its revolving credit facility to cover the gap. The interest rate on that facility was higher than most of the discounts I had negotiated. In effect we were borrowing money from the bank at one rate in order to lend it to our software suppliers at a lower one, and I had been describing it as a saving.
I had never asked, because nobody had told me it was my question. My department negotiated the contracts and finance paid the invoices. Payment terms looked like administration, and nobody saw the renewal calendar as a forecast of cash.
Now treasury sees our renewal calendar a year ahead, and for every contract above fifty thousand pounds the choice between annual, quarterly and monthly payment is made with finance, using the company's actual cost of borrowing at the time. Some contracts stayed annual, because the discount was worth it. Most moved to quarterly in advance, a few to monthly, and three renewals were moved to the autumn when they next came up, so the payments no longer all land in one quarter.
The licence cost barely changed. What changed is that the spring cash dip that finance used to plan around has largely gone.
A discount for paying early is the supplier paying us interest on a loan we are making them. Whether that is a good loan depends on what the money costs the company, and that was never something I could decide alone.
– Serguey Shinder
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