Shortening payment terms by a few weeks can free up more liquidity than a new loan—and costs you zero interest.
For many businesses in the manufacturing industry, debtor days are the biggest silent drain on cash flow. You deliver, invoice, and then wait 45, 60, or sometimes 90 days for payment, while having to pay your own suppliers and staff within thirty days. Before looking at external finance, it pays to see whether you can shorten that timeframe yourself.
This article provides a practical overview of measures that make a genuine difference, along with a worked example so you can calculate the liquidity impact of reducing debtor days yourself.
Why debtor days stretch out
In the manufacturing industry, extended payment terms rarely happen by chance. Major clients and OEMs typically enforce standard procurement terms of 60 days or longer, leaving suppliers with limited negotiating power. Internal factors also play a part: unclear invoices, slow internal approval processes at the client end, and the lack of a structured credit control process on your side.
The good news is that part of this delay can definitely be influenced, even if you cannot alter the contractual payment terms.
Proven measures that help
- Invoice immediately upon delivery or completion, rather than waiting until the end of the month
- Ensure invoices are flawless: correct PO number, correct contact person, accurate specifications
- Send a payment reminder a few days before the due date, not only after it has passed
- Follow up larger invoices with a phone call rather than just emailing
- Use stage payments for longer projects rather than a single final invoice
- Formalise payment terms and escalation steps in an internal credit control policy
- Consider a small early payment discount for smaller clients
Getting your internal processes in order
Many businesses underestimate how much delay stems from their own administration. An invoice left sitting for three days before being sent counts directly towards your debtor days. Ensure invoicing is an integrated part of the project handover process, not a task left at the back of the queue.
Appoint one person within the business responsible for credit control, even if it is a part-time responsibility. Without ownership, the process inevitably slips, especially during busy periods.
Worked example: liquidity gained from shorter payment terms
Suppose you have an annual turnover of €2,400,000, spread evenly throughout the year, equating to €200,000 per month. Your average debtor collection period is currently 60 days. That means an average of €400,000 in outstanding invoices is open (two months of revenue).
If you manage to shorten this period by ten days to 50 days, the average outstanding balance drops to around €333,000—freeing up roughly €67,000 in working capital. That is liquidity released without paying any interest, purely through better credit control.
When internal measures are not enough
Sometimes the extended payment term is simply fixed in the contract with a major client, and negotiating it is not realistic in the short term. In that case, bridging the gap between delivery and payment with external financing is a logical next step, for example via factoring or an overdraft facility.
For businesses in the Eindhoven region acting as suppliers to the high-tech industry, this is a familiar dynamic: the client dictates the terms, and the supplier has to fund the gap around the payment terms. If so, check our page on factoring to explore the possibilities.
Combine internal improvements with external finance
The most effective approach combines both angles: first, improve what you can influence yourself in your billing and credit control procedures, and then deploy targeted financing for the portion of the payment terms fixed by contract. This prevents you from borrowing unnecessarily to fund delays you could have eliminated yourself.
What to do next
Map out your current average debtor days per customer group and identify where the biggest delay lies: on your side, or with the client. Implement at least two of the suggested measures and review the impact after a quarter. If a structural liquidity shortfall remains due to contractual payment terms, visit our working capital page or request an advisory consultation.
Frequently asked questions
- How much liquidity does reducing debtor days unlock?
- That depends on your turnover and current debtor days. As a rule of thumb: each day you shave off reduces your average outstanding debtor balance by roughly your daily sales figure; model this with your own numbers.
- Can I, as a small supplier, negotiate payment terms with a large client?
- Often only to a limited extent, especially with major OEMs operating standard procurement terms. In that case, focus primarily on internal measures such as faster invoicing and disciplined chasing, and consider external finance to bridge the remaining gap.
- Is factoring a replacement for sound credit control?
- No, it is a complement. Factoring solves the liquidity issue but not the underlying cause; good credit management remains essential to minimise costs and maintain healthy client relationships.