High Versus Low DPO
A high DPO is often viewed as a sign of strong working capital management. Companies that negotiate longer payment terms retain cash longer, improve liquidity, reduce reliance on external financing and often strengthen the cash conversion cycle.
“Improvement in a company’s working capital and available liquidity allows it more flexibility to respond to opportunities and challenges that arise,” notes Suraj Kalati, Head of Working Capital Solutions at Wells Fargo.
But a high DPO is not automatically desirable; it can signal cash flow problems or inefficient payment processes. Slow payments may damage supplier relationships, result in late fees, reduce negotiating leverage or lead suppliers to favor other customers during periods of constrained supply. Delaying payment can cause businesses to miss valuable early-payment discounts as well. Discounts of 1% or 2% for prompt payment can generate annualized returns that exceed many alternative uses of cash.
A low DPO has both advantages and disadvantages, too. Paying suppliers promptly strengthens trust and may lead to preferential pricing, better service or prioritized access to inventory. It can also accelerate relationships with new suppliers and allow companies to capitalize on early-payment discounts. The downside is that paying too quickly diminishes liquidity and may indicate that a company has failed to negotiate favorable payment terms.
The optimal DPO lies somewhere between these two poles. The objective is not to maximize or minimize the metric, but to align payment timing with the company’s cash position, supplier relationships and broader strategy for working capital.
“People want to maximize everything,” notes Johann Moulinier, Treasury Manager at US Fertility, the largest physician‑led fertility network in the United States, “but with DPO, you want to optimize — to improve cash flow and liquidity without risk to your operating supply or relationships.”
“Maximizing DPO can lead to higher costs in the long term,” Kalati warns. “You might improve your balance sheet temporarily, but you won’t improve the economics of the overall supply chain.”
MEASURING AND BENCHMARKING DPO
Accurate measurement is the foundation of effective DPO management. Although the calculation itself is straightforward, businesses should account for seasonal purchasing patterns, regional differences and one-time fluctuations that can distort results. Rolling averages often provide a more representative picture than a single point-in-time measurement. “DPO has little meaning in isolation; it needs context,” Kalati points out. Benchmarking should extend beyond industry averages. To identify opportunities for improvement, companies should compare their DPO against:
• Peer organizations of similar size, vertical and profile
• Historical performance
• Other business units
• Geographic regions
DPO should generally be monitored monthly, reviewed quarterly to identify trends and evaluated annually against competitors and broader industry benchmarks. Organizations with highly seasonal or unpredictable purchasing patterns may benefit from more frequent analysis.
Benchmarking against peers is crucial, but some organizations’ DPO may be affected by variables that make it difficult to find peers to benchmark against. That is the case for Ardent Mills, North America’s leading flour supplier, where prices fluctuate with the seasons. “What we pay for grain can change year over year based on the harvest and the economy,” says Jill Barnes, Senior Manager of Debt Capital Markets and Treasury Operations. Ardent Mills’ DPO is also affected by factors like commodity regulations, which require fast payment unless there is a bilateral supplier agreement for extended terms. The company looks to its bank partners, public financial reports and a market intelligence platform for the data it needs to identify peers.
DPO benchmarking should also consider other related performance indicators, such as invoice approval cycle times, discount capture rates, payment exceptions, supplier satisfaction and cash forecasting accuracy. Together, these measures provide a more complete picture of working capital performance than DPO alone.