This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2010; for more information about IOMA publications visit www.ioma.com

Monitoring your days payables outstanding (DPO) metric is important because it is a key component in your company's formula for calculating working capital. Companies must maintain the proper amount of working capital to pay for daily operations and to finance future growth. So if your DPO is out of whack, it will throw your company's working capital out of whack, too-and you'll get someone from the CFO's office knocking on your door.

 

Overall DPO Is 32

Click the image for larger versions

On an overall basis, companies have a DPO of 31.9, a 0.3% improvement over the prior year, according to results of the Tenth Annual Working Capital Survey conducted jointly by REL and CFO magazine. The increase in DPO—which is slight—represents an improvement to working capital, since it means cash is going out the door more slowly.

The survey uses the following formula for DPO: Year-end trade payables (excluding accrued expenses)/(sales/365).
Note that the formula used in this survey uses sales in the denominator. Some companies calculate DPO based on purchases. That is, they use cost of goods sold instead of sales.

The accompanying table includes the latest DPO data for 57 industry sectors. This can give you some idea of how other companies in your sector are paying their vendors. Keep in mind that the information is only a rough gauge of this because your competitors will have a mix of different vendors and discount terms. Of course, the discount terms have a direct impact on the timing of a payment.

 

Adjusting Your DPO

Working capital consists of current assets (such as cash, accounts receivable, and inventory) minus current liabilities (accounts payable). A company can adjust its amount of working capital by altering the components. For example, you can shorten the terms of payment for accounts receivable or change inventory levels to better reflect sales. The idea is to keep the cash flowing to meet daily operating needs.

AP can be used to adjust working capital by stretching payment terms. Sometimes this is done on an official basis by negotiating more favorable payment terms. It can also be done on an unofficial basis. That is, upper management sends the word to simply pay vendors late. They may claim that "everybody’s doing this." The data in the survey may or may not back this up. The trouble is this approach could be problematic.

Squeezing suppliers with tougher terms or delayed payments will trigger more phone calls to AP from disgruntled vendors. Not only will this mean headaches for AP, but it can destroy goodwill with vendors. Also, dragging out payment dates can result in lost discounts. What’s more, in the long run, vendors can raise prices to cover the extra costs they incur due to tougher payment policies.

 

For More Information

Full details of DPO statistics by industry and by company are available on the REL Web site at www.relconsultancy.com.

Median DPO for 57 Industries
	2006	Percent Change
	DPO	2006/5	2005/4
Aerospace & defense	30	14%	0%
Air freight & logistics	22	0	-9
Airlines	15	-14	-8
Auto components	47	7	-9
Automobiles	17	-4	-12
Beverages	17	5	-25
Biotechnology	16	-2	5
Building products	26	7	9
Chemicals	31	-1	-5
Commercial services & supplies	19	2	7
Communications equipment	25	2	-15
Computers & peripherals	43	10	-9
Construction & engineering	32	-2	-2
Construction materials	17	-6	-1
Containers & packaging	36	4	8
Distributors	32	-13	6
Diversified consumer services	11	21	-7
Diversified telecommunication services	26	3	17
Electric utilities	31	-9	17
Electrical equipment	33	-1	0
Electronic equipment & instruments	41	7	4
Energy equipment & services	31	-2	-3
Food & staples retailing	18	-3	0
Food products	23	-2	8
Gas utilities	26	-37	32
Health-care equipment & supplies	17	-3	-4
Health-care providers & services	27	-1	5
Health-care technology	15	2	2
Hotels, restaurants, & leisure	14	4	0
Household durables	17	-17	13
Household products	28	1	-4
Independent power producers & energy traders	37	2	-16
Industrial conglomerates	26	6	-13
Internet & catalog retail	29	6	-2
Internet software & services	7	15	28
IT services	12	-14	-7
Leisure equipment & products	25	11	-9
Life sciences tools & services	29	20	4
Machinery	30	4	-10
Marine	20	5	1
Media	20	-5	5
Metals & mining	25	-9	-3
Multiline retail	25	-2	-4
Multi-utilities	37	-15	15
Office electronics	26	7	1
Oil, gas, & consumable fuels	29	-5	9
Paper & forest products	26	3	-3
Personal products	15	-2	-29
Pharmaceuticals	20	15	-12
Road & rail	16	-14	-11
Semiconductors & semiconductor equipment	26	4	-5
Software	14	15	-12
Specialty retail	24	1	-8
Textiles, apparel, & luxury goods	23	13	-11
Tobacco	20	13	3
Trading companies & distributors	21	-4	-5
Wireless telecommunication services	27	-9	1

 

# # #

Next Steps

• Read the Special Report: "ACH for Accounts Payable: What's the hold-up?"