Listen to Bob and Avoid the Pitfalls of DPO

In a recent post over on the Supply Chain Management Review on smart working capital management, Bob points out the pitfalls of being tempted to be preoccupied with DPO (days payable outstanding). While the objective to match DPO up with DSO (days dals outstanding) is an admirable one, as this would balance the cash cycle time tied up in accounts receivable (waiting for your customers to pay you) with the cash cycle time contributed by supplier payment terms, this can be counter-productive. Since this usually results in requests for DPO extensions, it leaves untested the willingness of suppliers to entertain aggressive discount payment terms in exchange for early payment by the customer. From a balance sheet perspective, cost savings are always better than favorable DPO terms. Plus, if the organization can negotiate aggressive discount terms from its supplier(s), it can then offer its customers discount terms which could speed up their payments to the organization.

If the organization speeds up its payments to its suppliers and its customers speed up their payments to the organization, the net result is not only a shorter cash cycle time, but, as a side effect, the payment cycles will start to line up — allowing Procurement to accomplish its original goal of balancing DSO and DPO while saving money. That’s a win-win that all parties at the table can win with. So listen to Bob and avoid the pitfalls of DPO preoccupation.