I want to increase our DPO and was curious if anyone has ideas on best practices. Our A/P systems are set to pay based on due date and we cut checks/ACH's three times a week. I don't want to just hold all A/P at the end of a month or quarter as I will probably pay for this in price or unearned discounts. Any thoughts?
Increasing DPO (Days Payable Outstanding)
Answers
I don't mean to over-simplify but in a nutshell: vendor
Those are my first two thoughts if not exhausted already. Good luck - do share if you find success.
I would prepare a clear letter to your customers explaining why the change is being implemented and asking for their support. (and/or requiring their support). The trick is that you do not want to get your customer concerned that you have cash flow problems and you do not want to receive back price increases in return. So letters explaining what you will gain and what your partner will gain is imperative. Be sure your sales force is prepared before the customer calls them.
In my past corporate roles, I ran AP, procurement and
As Vernon discusses, any changed vendor relationship will need to be managed.
Payment conditions: A DPO increase can often be achieved by renegotiating payment conditions with suppliers. Best-practice approach here is to first get an overview of all payment terms in use and to define a clear set of payment terms for the future. Renegotiations with suppliers are based on these new standard terms. It is critical to take into account supplier specifics. For those with liquidity constraints the focus should lie on prices, whereas for suppliers with high liquidity the payment term can often be extended.
As an alternative where there is cash flow problems and you don't want your vendors to know is to slowly lengthen the payment cycle but paying consistently on that cycle. An example is your terms are Net 30 and you always paid on time. Lengthen the time to 35 days for several months and then 40 days, etc.
It takes more finesse and time, but then again your hiding the fact that you are in trouble. Even if your business may recover, you will have effectively increased your terms without price increases.
This is not a sure-fire method and it does take considerable time and vendor relationships.
If I understand you correctly, you want to find a way to pay your vendors later, without any loss of discounts or price increases. That is, you want to pay later, but not to suffer the consequences of having done so. That sounds to me like the same philosophy that says, why not pay your employees less, but expect them to do the same work, with the same amount of dedication, enthusiasm and loyalty?
One can, of course, as others have suggested, negotiate credit terms in much the same way as one might price or other factors -- or possibly one is in a position such that one can simply impose different terms -- which usually is only the case if one is a sufficiently large customer that the vendor cannot afford to lose your business. Of course, if one is in that position, one could also just negotiate different pricing as well.
All that having been said, there are times when tight cash flow essentially dictates that stretching out payment terms is required to stay afloat -- where there is little choice but to ask your vendors to help finance your business for a short time. But there is not really any systemic way to do this -- you really have to know your vendors, to know how they will react.
I have worked with several start-up companies where I was required to spend at least one-half of my time managing A/P -- fielding calls from vendors, determining which vendors we had to pay to keep the lights on, vs which could be put off for another week, which vendors might be placated by a token payment now, etc. I hope not to find myself in such a role again!
The credit card people have electronic payment programs that can allow you to pay vendors within their stated terms (taking the advice about negotiating the best terms possibble first), float your payment on a monthly billing cycle (which adds an average of 15 days to your DPO) and the payments earn reward points that can used for travel or cash back.
What credit card program are you referring to? Is this a program that you can set up automatically or is it a manual process? Currently, I try to pay as many vendors as possible on my cc when they are due per our terms, but it is very manual by either calling them, faxing in a form or sending an email. I need a process that doesn't take a day or two to make cc payments.
Obviously terms are the biggest lever. This should be a periodic Purchasing goal to approach vendors and negotiate 60-day terms.
On the
We have p-cards as well, but few vendors are dumb enough to accept terms and card fees, so it has minimal impact. Plus, nothing is worse than having your card provider decline a transaction because of some adminstrative or communications foul-up (didn't post payment correctly, someone used up credit limit, etc).
Final thought: before just stretching a vendor, consider asking in advance. Maintaining good vendor relations goes a long way.