What is DPO?
Days Payable Outstanding (DPO) measures
the average number of days a company takes to pay its suppliers and provides
insight into a company’s cash management and liquidity position.
Why is it important?
DPO can be a powerful strategic tool that
not only offers insight into your company’s cash flow and payables but, when
used effectively, can strike a balance between maintaining a healthy cash flow
and preserving good relationships with suppliers.
What is the optimal range for DPO?
There
is no set number of days in considering the optimal range for DPO. Rather, you
should strike a balance between being able to hold on to and utilize your cash
while not incurring penalties or jeopardizing supplier relationships. This can
be anywhere from 45 to 90 days.
What is considered best practice for DPO?
Effectively utilizing DPO typically means
extending the time you have
to pay
your suppliers without incurring penalties or harming supplier relationships.
Here are some strategies that you can use
to effectively manage and potentially increase DPO:
• Take Full Advantage of Payment Terms: If
your supplier gives you 30 days to pay, take the full 30 days unless there is
an early pay discount that outweighs the benefits of holding on to cash longer.
• Negotiate Longer Pay Terms: Try to
renegotiate your pay terms. Suppliers are often willing to extend payment terms
for reliable customers.
• Evaluate Early Payment Discounts: While
extending DPO is generally advantageous, it may make sense to pay early if your
supplier offers a substantial discount to do so.