Days payable outstanding (DPO) is a key indicator in corporate finance. It measures the time it takes a company to honour its supplier debts after receiving invoices. Optimizing this ratio brings more consistent cash flow and stronger overall financial management for SMBs.

1. Why is DPO important?

DPO plays a central role in the cash conversion cycle (CCC). Efficient management of this ratio lets you extend your available cash and invest intelligently before paying suppliers.

A high DPO means that the company holds on to its cash for longer, which can improve profitability. But excessive delays can also damage supplier relationships. Conversely, a low DPO indicates prompt payments, promoting strong business relationships but limiting available cash.

So naturally, you want to find the right balance. If you can invest or redeploy liquidity in smart ways, without being late on payments or jeopardizing interactions with suppliers, that’s ideal. 

Many companies adapt their payment strategy according to their industry. For example, in the manufacturing sector, it’s common to have longer DPOs due to high purchasing volumes. Conversely, service companies often prefer a shorter DPO in order to strengthen links with their service providers and reduce outstanding debts.

2. How to calculate DPO

Use the following formula to calculate your days payable outstanding:

• DPO = (Average trade payables / Cost of goods sold) x 365

Explanation of variables:

• Average trade payables: average of trade payables recorded over the period.
• Cost of goods sold (COGS): direct cost of goods and services produced and sold by the company.

Example DPO calculation

A company with average supplier debts of €500,000 and a COGS of €2,000,000 will have a DPO of:

• DPO = (500000 / 2000000) × 365 = 91.25

This means that the company takes an average of 91 days to pay its suppliers.

Whether this DPO is good or not really depends on your sector and the reasons behind the delay. If 91 days is within the agreed supplier payment terms, and the cash is otherwise being used positively, then this long delay may be quite good.

If you need three months to pay because of liquidity issues, that’s cause for concern. Like living paycheck to paycheck in your private life, you never want to be late on payments simply because you can’t afford them. 

3. DPO in the cash conversion cycle

DPO is a fundamental element of the cash conversion cycle (CCC), defined as follows:

• CCC = DIO + DSO - DPO

Explanation of terms:

• DIO (Days inventory outstanding): average duration of inventory before sale.
• DSO (Days sales outstanding): average collection period after a sale.
• DPO (Days payable outstanding): average time taken to pay suppliers.

A low CCC is a good indicator of financial efficiency, as it means that assets are rapidly converted into cash. A company that manages to shorten its CCC improves its working capital and financial flexibility. And a longer DPO is one way to lengthen your cash conversion cycle. 

4. How to optimize your DPO

A well-managed DPO ensures a good balance between cash management and supplier relations. Here are the levers for optimization:

1. Negotiate advantageous payment terms

Talk to suppliers to obtain more flexible payment terms. If you can get longer terms without additional fees or interest, you improve your DPO without damaging your commercial relations. 

On the other hand, some suppliers offer early payment discounts, which can be advantageous in certain situations. Used wisely, these reduce the cost of goods sold and therefore increase your DPO. 

2. Automate accounts payable management

Financial management tools help to better plan and monitor payments, thus avoiding unintentional errors or delays. By integrating digital solutions, you can analyze cash flow in real time and make payments at the optimum moment.

3. Compare supplier offers

Exploring different options and negotiating favourable terms is an effective strategy for optimizing cash flow. Try to establish strategic partnerships with certain suppliers to benefit from better terms.

4. Monitor the impact on working capital

As mentioned above, a high DPO can be negative if it occurs for the wrong reasons. A DPO that is too high can weaken a company's reputation and damage its business relationships. Conversely, a DPO that is too low can reduce financial flexibility and limit investment opportunities. 

Use the calculations above to measure its impact on your cash conversion cycle and overall cash position. 

5. Harmonize the DPO, DSO and DIO

Optimizing DPO goes hand in hand with smart management of trade receivables (DSO) and inventories (DIO) to ensure healthy cash flow. Balanced management of these three elements ensures greater financial stability.

If your cash conversion cycle is out of whack, likely one or two of these factors is particularly at issue. So obviously deal with your most pressing concerns first. But great financial management is all about finding the right balance across all three. 

5. FAQ : Everything you need to know about the financial DPO

DPO vs DSO: what's the difference?

DPO refers to trade payables (payments to be made), while DSO measures trade receivables (payments to be received). Optimizing both ratios helps to avoid cash flow tensions.

Is a high DPO always advantageous?

Not necessarily. A high DPO improves cash flow but can damage supplier relations if it is excessive. It’s important to analyze the sector average before taking a strategic decision.

How can you assess whether your DPO is optimal?

Comparing your DPO to the sector average and analyzing its impact on your company's cash flow and reputation are key indicators. It’s also advisable to examine your payment history and look for opportunities for optimization.

Conclusion

DPO is a core pillar of cash management. Mastering your DPO and adopting best practices helps you optimize your working capital and maintain a balance between liquidity and supplier relationships.

A well thought-out strategy guarantees greater financial resilience and enhanced competitiveness.