Days Payable Outstanding
Candlefocus EditorA higher DPO indicates that the company is holding on to its funds and taking advantage of the extra time to invest, as well as to generate additional cash flow and liquidity. In addition, a higher DPO can also help a company balance out any cash deficit it may experience in the short term by leveraging its outstanding payables. This is especially beneficial to businesses that experience seasonality in their sales and cash flow, as DPO allows them to maintain more cash on hand to offset the slow cash flow times.
Conversely, businesses with lower DPO are considered more accommodating to their suppliers and creditors, as they often settle their accounts quicker. Moreover, a lower DPO can indicate that the company has both sufficient cash flow and an effective and proactive AP management system in place.
While higher DPO may be ideal from the company's perspective, it can send alarming signals to its creditors and suppliers, as they may perceive it as a sign of the company's inability or unwillingness to pay its bills promptly. Negotiations with creditors and suppliers can be affected by such perceptions and result in the loss of favorable terms, raised interest rates and harsh collection terms. This can further strain the company's financial situation, as the higher costs associated with such billing terms can increase a company’s expenses.
In short, understanding and regulating the DPO of a business can play a major role in achieving sustainable cash flow and improving liquidity. Through careful monitoring and management of AP accounts, a company can take advantage of delayed payments to increase its available capital, while simultaneously maintaining the favorability of its creditors and suppliers.