Mastering Days Payable Outstanding to optimise procurement management and supplier relations in business

Days Payable Outstanding (DPO) is an essential financial metric for effective business management, strategic guidance and maintaining financial health. More than just a simple figure, it illuminates cash flow performance, reflects the quality of supplier relationships and guides sometimes complex decisions. In an increasingly rigorous European regulatory framework and facing growing competitiveness demands, understanding, calculating and managing DPO is a necessity for any company keen to optimise its resources and remain aligned with its ecosystem's expectations.

What is Days Payable Outstanding (DPO)?

Days Payable Outstanding is a financial ratio that measures, in days, the average time a company takes to settle its supplier invoices. It's a strategic indicator both for procurement management and the quality of relationships with commercial partners.

This metric forms an integral part of the Cash Conversion Cycle (CCC), which evaluates a company's ability to convert its stock investments into cash through sales. Balanced DPO management contributes to optimising working capital and ensuring smoother cash flow management.

DPO is thus much more than an accounting figure: it sits at the crossroads of financial and operational challenges. It determines cash availability, investment capacity and, in certain cases, the company's reputation with its suppliers.

How to calculate DPO?

To effectively manage this indicator, it's essential to know how to calculate Days Payable Outstanding correctly. The standard formula is as follows:

DPO = Accounts Payable × Number of days / Cost of Goods Sold (COGS)

• Accounts Payable: total number of supplier invoices awaiting payment;
• Number of days: analysis period, generally 365 days for a complete year;
• COGS (Cost Of Goods Sold): cost of goods sold over the same period.

Practical example: If a company presents £500,000 of accounts payable over the year and COGS of £3,000,000, the DPO can be calculated as follows:

DPO = 500,000 × 365 / 3,000,000 = 60.8 days

The company therefore takes an average of 60.8 days to pay its suppliers.

Interpreting DPO: what does a high or low DPO mean?

Before acting on your company’s DPO, it's wise to understand its implications. This indicator must be interpreted according to the corporate strategy and the sector's standards.

High DPO

A high DPO means the company retains its cash longer before paying its suppliers.

Advantages:

• Improved available cash flow;
• Better working capital optimisation.

Disadvantages:

• Risk of deteriorating supplier relationships;
• Possible financial penalties or contract breaches.

Low DPO

A low DPO indicates faster payments.

Advantages:

• Strengthened trust and commercial relationships;
• Possibility of obtaining better conditions (discounts, priority supply).

Disadvantages:

• Less optimised cash flow;
• Reduced financial flexibility for unexpected needs.

Why compare DPO to sector standards?

Each sector has its own payment terms standards, often dictated by commercial practices or regulation. A significant gap from the sector average number may reveal improvement opportunities or signal an imbalance. It's therefore recommended to regularly compare your DPO with sector benchmarks to adjust strategy.

Sector comparison

Here's an overview of average DPO observed by business sector and their interpretation:

Business Sector	Average DPO (days)	Comparative Analysis
Manufacturing Industry	60	Sector standard, high optimisation
Distribution	45	Shorter period, privileged relationships
Services	35	Rapid payment, less optimised cash flow

Case study: In the industrial sector, margins can be heavily constrained by raw material costs, energy, logistics and equipment investments. To preserve their cash flow and finance these heavy needs, many industrial companies adopt strategies aimed at extending the average supplier payment period - in other words, increasing their DPO.

A European company specialising in automotive component manufacturing, achieving an annual turnover of £150 million. Historically, its DPO stood at 60 days, in line with the manufacturing sector average. However, under pressure from rising raw material costs and declining cash, finance management decides to progressively increase its DPO to 75 days.

This strategy allows the company to retain several million pounds of additional cash, which is reinvested in production and new product development. In the short term, the positive effect on working capital is undeniable: the company avoids resorting to costly bank finance and improves its financial autonomy.

But this decision isn't without consequences: certain strategic suppliers, particularly local SMEs, quickly express tensions, explaining that these extended payment terms weaken their own cash flow. The company then notices a decline in supply quality from two critical suppliers, as well as delays in certain deliveries. These incidents subsequently cause disruptions in the production chain and penalties for non-compliance with delivery times to its own customers.

After analysis, procurement management and general management decide to engage in dialogue with key suppliers. An action plan is implemented to return to an average DPO of 65 days for the most strategic partners, whilst maintaining a higher DPO (75 days) for non-critical suppliers or those with greater financial strength. In parallel, digitalisation of supplier accounting is accelerated to reduce administrative costs and secure flows.

This case study well illustrates the trade-offs decision-makers must make between cash optimisation and maintaining a reliable supply chain. DPO management cannot be reduced to a unilateral approach: it requires detailed analysis of the supplier portfolio, considering their strategic importance, financial strength and sector practices. Excessive optimisation can jeopardise relationship quality and the company's overall resilience.

Strategies to optimise DPO

Optimising DPO doesn't mean maximising it at all costs but finding the right balance between cash and supplier relationships. Several levers can be activated.

1. Negotiating payment terms

It's possible to obtain more favourable payment terms during contractual negotiations, provided transparent dialogue is maintained and mutual trust preserved.

2. Automating accounting processes

Digitalisation of accounting processes reduces errors, accelerates invoice processing and improves visibility on payment dates.

3. Monitoring payments proactively

Digital tracking tools facilitate payment schedule management and enable rapid detection of discrepancies.

4. Finding balance

Refined DPO management requires continuous analysis of financial indicators and supplier feedback. This balance contributes to productivity, reduces costs and strengthens strategic partnerships.

Inset: "Supplier management costs average £1,000 per supplier per year, whilst transactional costs vary between £19 and £95 per transaction, depending on digitalisation level. Beyond these savings, these measures contribute to improving team productivity and strengthening strategic partnerships." - Quentin Burès, Procurement Optimisation and Digitalisation Manager, Manutan

DPO in the European context,

DPO management cannot be separated from European regulatory frameworks or local practices. Companies must work within these constraints to remain competitive and avoid sanctions.

Impact of European regulations

European directives set maximum payment terms (often 60 days) to combat payment delays and protect suppliers, particularly SMEs.

Country comparison

Practices vary significantly: in Germany, payment terms are generally shorter than in France or Italy, reflecting different cash management cultures.

Fiscal and accounting considerations

Local specificities, whether fiscal, accounting or social rules, must be integrated into DPO strategy to ensure compliance and strengthen competitiveness.

Inset: "Research has shown that the existence of customer payment delays increases supplier default probability by 25%, and even 40% when these delays exceed 30 days. Fighting payment delays therefore remains an essential issue of competitiveness and survival for companies." - Thierry Millon, Research Director, Altares[1]

Days Payable Outstanding is a powerful lever for managing cash flow, improving procurement management and maintaining balanced supplier relationships. A controlled approach adapted to your sector and geographical context transforms this indicator into a genuine strategic asset.