Do you know your DPO?
Days payable outstanding (DPO): It’s a metric we hear a lot about on the accounts payable (AP) side, but what is its impact on your business?
Simply put, DPO offers transparency into how long your organization takes to pay its vendors. It’s not an estimate — it’s a calculated ratio that takes into consideration the average of outstanding payables during a specific period and the average amount AP is paying out over that same period.
The higher the value of the DPO, the longer your organization is taking to pay its vendors, on average. We’ll discuss why that’s important in a moment.
The survey
The recent Hyland AP Control Panel, conducted in partnership with the Institute of Finance and Management (IOFM), surveyed more than 300 AP professionals about their level of insight into the DPO metric. The question here was simple: Can your organization track days payable outstanding?
Here’s what the survey respondents told us.
This appears to be good news. Three out of four AP professionals can track their DPO.
Now let’s see whether their ability to track DPO is related to how automated their organizations are. This was determined by evaluating the percentage of invoices they are able to process with no manual intervention:
- Significant automation: 70 percent or more
- Moderate automation: Between 21 and 69 percent
- Limited automation: 20 percent or less
While the moderate and significant automation groups exceeded the overall average of three in four respondents being able to track DPO, here we see that limited automation organizations can track DPO in only two of three cases.
Is this a problem?
It is, yes, and not just for those with limited automation. Here’s why.
Historically, a high DPO has been considered desirable. That usually means the organization is making good use of its cash by holding onto it as long as possible before paying vendors.
For organizations that are paying within vendors’ negotiated terms, a high DPO also means they have good credit, since the vendors have agreed to give them more time to pay. This usually indicates a solid payment history and a valued business relationship.
But there’s something else to consider here too. Stretching payments may mean an organization is having trouble paying its bills, whether that is due to a cash flow problem or to an inefficient AP process.
Like any metric, DPO is useful on more than one level. Clearly, it’s a way for treasury to know how much working capital it has available on average and it paints a picture for potential vendors — creditors — to make discounting and payment term decisions. But it also tells AP leadership whether they’re doing their jobs efficiently enough to meet the organization’s expectations in turning around payments.
For example, if the average DPO for the organization’s industry is 57 days, but yours is 75, what’s wrong? Rest assured that your vendors are keeping track of that and comparing your payment history to other similar businesses, some of whom may be your competitors.
DPO is a balancing act
There’s an ideal window you want your DPO to be in for optimum fiscal health. Too high, and you may alienate your vendors. Too low, and you may not be using your working capital to best advantage.
Of course, factoring in fast-pay discounts complicates the situation, especially if you’re working with dynamic discounting. But treasury should know what your DPO ought to be, based on your negotiated discounts, cash flow needs and a number of other factors.
Simply banging out payments as quickly as you can to capture discounts is not a well-conceived strategy, nor is holding payments until the last possible moment. There should be a plan in place for optimizing working capital by holding onto cash while still maximizing discounts, and DPO is a key component of determining that.
Accounts payable is the gatekeeper for the organization’s cash, so if you can’t track DPO, who can? Not knowing this important metric not only deprives you of transparency into your department’s efficiency, it robs the entire organization of business intelligence essential to its viability.
Your solution should help
When you consider the “significant automation” group from the survey — organizations that typically process over 100,000 invoices a year and handle most of their payments without manual intervention — it becomes apparent that one in four of them being unable to report DPO is concerning. However, smaller organizations tend to be even more in the dark when it comes to DPO — which is likely to affect their ability to grow.
If your AP automation solution isn’t providing you with the working capital transparency you need to run your business effectively, then it’s time to think differently. It’s time to gain insight to your DPO and other essential metrics to help your business thrive.
Ready to learn more? Check out the AP Control Panel here.
