Days Payable Outstanding: 5 tips for optimizing your payment processes
Days Payable Outstanding (DPO) isn’t just another financial metric; it’s a pretty substantial lever businesses can use to optimize liquidity and cash flow, improve supplier relationships, and fine-tune overall financial health. The trick is to use DPO strategically, rather than simply viewing it as a number to monitor.
DPO measures how long your company holds onto cash before paying suppliers. The classic Goldilocks principle applies here: Too high a DPO or too low a DPO each have their positive and negative impacts on cash and operations. It’s all about managing DPO effectively to find that balance — that’s just right — and aligning it with your broader financial and net working capital strategy.
To that end, this blog offers five tips to help you make the most of your DPO, leveraging automation, strategic relationships, and regular reviews to stay competitive and keep cash flowing.
Understanding Days Payable Outstanding (DPO)
Some background first, or a refresher. DPO measures the average number of days a company takes to pay its suppliers. It’s calculated by dividing your average accounts payable balance by the cost of goods sold (COGS), then multiplying by 365. Simple, right?
But the implications can be significant:
- High DPO: You’re holding onto cash longer, which can be great for liquidity — assuming you’re not sacrificing supplier relationships or missing early payment discounts.
- Low DPO: Faster payments might buy goodwill with vendors, and you might even capture some discounts, but it can leave you with less flexibility for other financial commitments.
A carefully managed DPO helps companies maintain strong cash reserves, but the key is to avoid the extremes. Monitoring DPO and comparing it to industry standards ensures that your payment strategy supports your financial goals. Ideally, your DPO should align with your cash flow needs and industry benchmarks without veering into extremes that disrupt operations or relationships.
It’s important to note that DPO is just one aspect of working capital management. Its strategic value is in how it integrates with other financial measures—like Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO)—to complete the picture of how efficiently a business is managing its cash flow cycle.
Implications of DPO on cash flow management
Managing DPO effectively is like walking a tightrope. On one side, you want to keep cash in-house as long as possible, giving your business more liquidity for investments or day-to-day expenses. On the other, you don’t want to push payments so far that suppliers start raising eyebrows—or worse, raising their prices.
Ironically, cash retention comes at a price that, stretched too far, will actually end up costing the company money (and probably your MVP customer status). If suppliers perceive your company is delaying payments excessively, along with losing trust you’ll be losing discounts and favorable prices while being saddled with tighter credit terms. None of which is going to help your cash flow.
Key takeaways:
- A longer DPO means more cash on hand, but you must avoid damaging supplier trust.
- Aligning DPO with receivables creates smoother cash flow.
- A balanced DPO enhances liquidity, boosts working capital, and strengthens financial health—without jeopardizing vendor relationships.
- Managing DPO strategically can also signal good financial health to investors by maintaining a stronger balance sheet.
Industry benchmarks for evaluating DPO
DPO isn’t one-size-fits-all. Depending on your industry, the average DPO can vary widely. Across sectors, you’ll find a typical range of 30 to 40 days, but manufacturing often extends beyond that, up to around 60 days, due to negotiated credit terms with suppliers.
Understanding these benchmarks is crucial. Remember, you’re not chasing an ideal number, but if your DPO is significantly higher or lower than the industry standard, it could signal either advantageous terms or a red flag. Comparing your DPO to these benchmarks helps you gauge where you stand and whether adjustments are needed.
For example, industries that rely heavily on inventory, like retail or manufacturing, tend to have longer DPO cycles because of the extended credit terms negotiated with suppliers. In contrast, service-oriented industries may have shorter DPO cycles because they lack the inventory component.
Benchmarking isn’t just about where you stand relative to others. It’s about knowing whether your DPO is helping or hindering your broader business strategy.
Tip 1: Leverage technology and automation
Business is digital, so managing DPO manually just isn’t feasible anymore. Automation is transforming accounts payable (AP) management, and businesses that embrace it are seeing real benefits.
AP automation platforms, like those offered by Corcentric, provide real-time visibility into your payables and cash flow. Automated workflows handle invoice routing, approvals, and even payment processing, ensuring you never miss a payment deadline—or worse, overpay due to manual errors. With built-in dashboards, finance teams can monitor KPIs like DPO in real-time, optimizing payment timing to keep cash flow steady and relationships intact.
But automation doesn’t just streamline processes, it gives you insights. The more you automate, the more data you collect on payment timing, approval bottlenecks, and cash flow trends. This data helps finance teams fine-tune their DPO strategies and decision making in real time, ensuring they’re not only maximizing liquidity but also maintaining strong supplier relationships.
Automation helps you:
- Track invoice aging in real-time to prioritize payments.
- Eliminate manual errors and ensure timely payments to avoid late fees.
- Take advantage of early payment discounts and negotiated terms.
Ultimately, automation takes the guesswork out of managing DPO, giving finance teams the tools to be proactive rather than reactive.
Tip 2: Negotiate better payment terms with suppliers
One of the most straightforward ways to optimize DPO is through negotiation. Collaborating with suppliers to extend payment terms can free up cash for other uses, but it’s a delicate ask.
Of course, negotiating better terms doesn’t always mean asking for the longest possible extension. Instead, it’s about flexibility — finding payment schedules that work for both parties. This is where maintaining solid supplier relationships comes in. It can open doors to more favorable terms, whether that’s a longer DPO or discounts for paying early.
Suppliers often have incentives to offer extended terms, especially if it means keeping a steady customer relationship. However, negotiation is a two-way street. While pushing for more favorable payment terms can help lengthen DPO, it’s essential not to overlook the advantages of early payment discounts. Sometimes, taking advantage of these discounts might save more in the long run than extending the DPO.
When negotiating:
- Focus on terms that balance cash flow with maintaining good supplier relationships.
- Weigh the value of extended terms against the benefits of early payment discounts.
- Communicate openly with suppliers about their payment expectations and your financial goals.
A flexible approach ensures you’re not sacrificing long-term supplier trust for short-term gains.
Tip 3: Maintain strong supplier relationships
At the heart of any payment process is the relationship you have with your suppliers. Strong relationships don’t just make operations run smoothly, they can also be a source of financial benefits.
A healthy relationship often gives you negotiating power to extend DPO without damaging trust. Suppliers are more likely to offer lenient terms when they know you’re a reliable partner. And in tight financial times, having that goodwill can be a lifeline. But this isn’t a one-way street. You must balance these extended terms with moments where you pay early to seize discounts or opportunities.
Building relationships takes time and effort, but the payoff is significant. Suppliers who trust you are more likely to offer flexibility during tough times, help you navigate supply chain challenges, and collaborate on cost-saving initiatives. These relationships are especially valuable when market conditions tighten, or when your business faces temporary cash flow issues.
How to nurture vendor relationships:
- Keep communication open and transparent about payment timelines.
- Offer shorter payment terms to key suppliers while extending terms with others.
- Take advantage of early payment discounts when it makes financial sense.
Ultimately, strong relationships mean your suppliers are more willing to work with you to meet your financial needs, making DPO management easier and more strategic.
Tip 4: Regularly review and adjust payment processes
The business landscape changes quickly, and what worked a year ago might not work today. That’s why regularly reviewing and adjusting your payment processes is essential for maintaining an optimal DPO.
Factors like market shifts, new vendor contracts, or internal changes can all impact DPO. Automating your payment process gives you the data to analyze your current performance and compare it against industry benchmarks. Regularly tweaking your processes based on real-time data keeps your DPO in check while aligning your payments with your company’s broader cash flow strategy.
For instance, your payment cycles may need to adjust if you’re onboarding new suppliers or scaling up operations, or if economic conditions become — unreliable. The key is staying agile and continuously reassessing your payment processes.
When reviewing:
- Look at your accounts payable aging regularly to catch inefficiencies.
- Use automation to track key metrics and make adjustments as needed.
- Align payment strategies with your company’s financial goals to optimize cash flow.
In the end, fine-tuning your DPO isn’t a one-time exercise — it’s an ongoing process.
Tip 5: Monitor related metrics (DSO and DIO)
DPO doesn’t exist in a vacuum. It’s one part of a larger financial puzzle that includes metrics like Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO). Together, these metrics form your cash conversion cycle — the time it takes to convert investments into cash.
While DPO measures how long you hold onto cash before paying suppliers, DSO tracks how quickly you collect cash from customers, and DIO measures how long inventory sits on your balance sheet before being sold. Monitoring these metrics in tandem helps you get a complete picture of your working capital efficiency.
High DPO + High DSO: You may be holding onto cash, but if it’s not coming in fast enough, it could signal liquidity problems. Low DPO + Low DSO: You’re managing payables and receivables well, but are you sacrificing liquidity for quick payments?
By tracking all three, businesses can fine-tune their financial strategies, ensure consistent cash flow, and avoid liquidity issues that could arise from imbalances in the cash conversion cycle. Or, you could take the next logical step and leverage in in-house outsource advantages of managed services to optimize your CCC.
Conclusion: Make DPO work for you
Remember, DPO is more than just a metric — it’s a powerful strategic tool. When managed thoughtfully, it can enhance liquidity, strengthen vendor relationships, and optimize cash flow. By leveraging technology, negotiating smart payment terms, and regularly reviewing your processes, you can keep your DPO in the sweet spot that benefits your business.
At the end of the day, making DPO work for your company means finding a balance that supports both your financial goals and your supplier relationships. Keep the lines of communication open, stay flexible, and let automation do the heavy lifting — your bottom line will thank you for it.
