What is days payable outstanding (DPO)?
Days payable outstanding (DPO) is the financial ratio that indicates the average time, in days, that a company takes to pay its bills and invoices to its suppliers. The ratio indicates how well a company’s cash outflows are being managed.
Businesses with higher DPO take longer to pay the bills. This means they can retain available funds for longer. This provides the company the opportunity to use those funds in a better way to maximise the benefits. However, a high DPO is not necessarily a good thing. It could be a red flag indicating an inability to pay bills on time.
Late payments became more public with the UK government’s Prompt Payment Code in 2008, in which businesses would voluntarily sign up to show that they were paying 95% of invoices within 60 days.
Understanding if your business days payable outstanding (DPO) is efficient
Most businesses without any other considerations would opt for delayed payment to increase their free cash flows. However, when you begin to add considerations into place that is not always possible, some businesses can’t delay payment as it’s tied to the concept of buying power.
Buying power and negotiation leverage stem from high-frequency orders, large volume, long-term relationships or a low number of customers. The more your supplier relies on you, the more negotiation leverage a business has.
For businesses that don’t hold this leverage, the risk of the supplier placing restrictions often becomes too great. However, if the customer comprised a significant percentage of the supplier’s total revenue, the supplier would be more likely to accept a request for delayed payment as it cannot afford to end its relationship.
Therefore, often a low days payable outstanding (DPO) shows less bargaining leverage and less free cash flow. Meanwhile, a high DPO could show high bargaining leverage, resulting in more free cash flow.
Considerations for understanding the DPO
Days payable outstanding values vary across different industries. Consequently, it’s often not worthwhile comparing these different values. Management should compare its DPO to the average within its specific industry to see if it is paying suppliers too quickly or slowly.
Factors such as global or local regulations, the overall performance of the economy, region and sectors, plus any seasonal impacts, can all change the DPO value average of a particular sector.
Find out if your business is managing the DPO efficiently
Use the B2BE Days Payable Outstanding (DPO) calculator to see what happens if your organisation can better manage its DPO days through better invoice management and accounts payable processes and practices, and how B2BE can help in this area.
About B2BE
B2BE delivers electronic supply chain solutions globally, helping organisations to better manage their supply chain processes, providing greater levels of visibility, auditability and control. We’re driven by a passion for what we do, inspired by innovation, and underpinned by a wealth of knowledge. With over 20+ years of experience, the B2BE teams operate worldwide.
For more information, visit www.b2be.com.