Trends of Days Payable Outstanding (DPO) on the economy

Cash is the lifeblood of any company. It’s more important than ever for businesses to optimize this fundamental aspect of financial performance if they’re to maintain a steady course in these uncertain times. Given that working capital is the cheapest source of cash, nothing is more vital than having a cash culture and good liquidity on board.

Chinese companies still recorded the longest average payment term at 92 days, with one in four companies being paid after four months.

What is DPO?

Adopting DPO best strategies

1. Using technology to shorten the cash conversion cycle

By delivering invoices electronically rather than via mail, the finance team can speed up billing and collection. By implementing a vendor portal, organizations can give vendors electronic access to invoices, enable electronic payments and reduce the time it takes to resolve disputes. These solutions also tend to provide organizations with timely and robust reporting that can help to take proactive steps to resolve delinquent accounts or take advantage of supplier discounts.

2. Making it visible — cash flow reporting and dashboards

To truly foster a cash management culture, it is important to actively track the cash flows. Forecasting is a critical step in cash management and ultimately improving profitability. This involves looking at both income and cash flow statements and linking your cash flow forecasts to key working capital metrics from the balance sheet, such as DIO (days inventory on-hand), DSO (days sales outstanding), and DPO (days payables outstanding).

To enhance the accuracy of these forecasts, consider automating this process rather than relying on error-prone and labor-intensive spreadsheets. It is helpful to actively review variances in actual results as compared to forecast and use this process to refine and improve the accuracy of your forecast assumptions. Be ready to move to weekly cash flow forecasting and reporting to improve visibility and reliability of the information, and consider establishing a cash committee to oversee this process and drive change through the organization.

Optimizing your financial functions

UK SMEs are owed £23.4 billion in late vendor payments! SMEs are forced to wait a month beyond agreed payment terms. Delay in late payments to SMEs is accelerating and it is causing the economy to slow down by increasing the risks for small businesses to become insolvent. The recent data from multiple SME businesses had shown that Day Payments Outstanding(DPO) had been increasing gradually. The average DPO Outstanding is 80 days for many countries.

European Union law on late payment- The new law will mean:

• Payment terms will not be allowed to exceed 60 days unless expressly written into contracts and provided those contract terms are not “grossly unfair” to the creditor.
• If there are no agreed terms, then the payment terms will be deemed to be 30 days.

There is a wide range of optimization techniques you can adopt to improve DPO. For instance, effective accounts payable practices include negotiating favorable terms and rebates with suppliers, issuing purchase orders for new orders, using available volume rebates and trade spend initiatives, and periodically benchmarking vendor contracts against industry standards.