Days Payable Outstanding (DSO): Why is this important?

Days Payable Outstanding (DSO): Why is this important?

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.

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