Accounts payable is an essential aspect of any business’ financial operations. It refers to the money that a company owes to its suppliers or vendors for goods or services purchased on credit. Managing accounts payable effectively is crucial for maintaining healthy cash flow, as well as building and maintaining good relationships with suppliers.
One way to measure the efficiency of accounts payable is through a metric called Days Purchases Outstanding (DPO). DPO is the average number of days it takes for a company to pay its bills. It is calculated by dividing the accounts payable by the cost of goods sold and multiplying the result by the number of days in the period being measured. DPO is a useful tool for assessing how well a company is managing its accounts payable and optimising its cash flow.
Accounts Payable Solutions
Managing accounts payable manually can be time-consuming and prone to errors. Fortunately, there are many accounts payable solutions available that can automate and streamline the process. An accounts payable solution is a software platform that helps businesses manage their accounts payable process more efficiently.
There are several types of accounts payable solutions available. These include: cloud-based solutions, on-premise solutions, and hybrid solutions that combine the two. Cloud-based solutions are becoming increasingly popular because they are accessible from anywhere with an internet connection. They also require no installation or maintenance, and are scalable to meet the needs of growing businesses. On-premise solutions, on the other hand, are installed on a company’s own servers and are generally more customisable. However, they require more maintenance and upfront costs.
Implementing an accounts payable solution offers several benefits, including increased accuracy, faster processing times, and reduced costs. By automating the accounts payable process, businesses can eliminate manual data entry errors and reduce the risk of fraud. Automated invoice processing also allows for faster processing times, reducing the amount of time it takes to approve and pay invoices. Furthermore, automating the accounts payable process can reduce costs associated with paper-based processes, such as printing and postage.
Common features of accounts payable solutions include automation, invoice tracking, and payment processing. Automation streamlines the entire accounts payable process, from receiving and scanning invoices to matching them with purchase orders and routing them for approval. Invoice tracking allows businesses to monitor the status of invoices throughout the approval process, reducing the risk of lost or missing invoices. Payment processing enables businesses to pay invoices electronically, reducing the need for paper checks and manual processing.
Working Out Your Business’ DPO
Days Purchases Outstanding (DPO) is a financial metric that measures the average number of days it takes for a business to pay its bills. It is a key indicator of cash flow management and accounts payable efficiency. A high DPO indicates that a business is taking longer to pay its bills, While a low DPO indicates that a business is paying its bills more quickly.
How to calculate DPO
To calculate DPO, use the following formula: (Accounts Payable / Cost of Goods Sold) x Number of Days. The variables in this formula are:
Accounts Payable: The total amount of money that a business owes to its suppliers or vendors for goods or services purchased on credit.
Cost of Goods Sold: The total cost of the goods or services sold by the business during the period being measured.
Number of Days: The number of days in the period being measured, such as a month or a year.
For example, if a business has $50,000 in accounts payable, $200,000 in cost of goods sold, and the period being measured is one year, the calculation would be: ($50,000 / $200,000) x 365 = 91.25 days. This means that on average, it takes the business 91.25 days to pay its bills.
DPO calculation: notes for best results
It’s important to note that the variables used in the DPO calculation can vary depending on the business and industry. For example, some businesses may choose to use net purchases instead of cost of goods sold. Others may use a shorter or longer period than one year. It’s important to be consistent in the variables used when calculating DPO to ensure accurate comparisons over time.
Comparing your business’ DPO to industry benchmarks can provide valuable insights into the efficiency of your accounts payable process. For example, if your business’s DPO is significantly higher than the industry average, it could indicate that you’re taking too long to pay your bills and may need to improve your cash flow management. On the other hand, if your business’s DPO is significantly lower than the industry average, it could indicate that you’re paying your bills too quickly and may need to negotiate better payment terms with suppliers.
Work out your business’ Days Payable Outstanding with our calculator here.
Tips for Maximising DPO
To improve your business’ DPO and cash flow management, consider the following strategies:
- Extend Payment Terms: Negotiate longer payment terms with your suppliers to give your business more time to pay its bills. However, be sure to maintain good relationships with your suppliers and communicate openly to avoid any misunderstandings.
- Negotiate Discounts: Consider negotiating early payment discounts with your suppliers. This can provide an incentive for your business to pay its bills more quickly while also saving money on purchases.
- Prioritise Payments: Prioritise payments based on their importance and urgency. This can help ensure that you pay the most important bills first and avoid any late fees or penalties.
- Use Technology: Consider using technology to streamline the accounts payable process. Electronic invoicing and payment platforms can help automate processes, reduce errors, and save time.
Maintaining good relationships with suppliers is important while managing cash flow. Communication and transparency can help build trust and ensure that both parties benefit from the relationship.
Conclusion
Accounts payable solutions and metrics such as Days Purchases Outstanding (DPO) play a vital role in managing the financial health of your business. Implementing an accounts payable solution can increase accuracy, speed up processing times, and reduce costs. Calculating DPO and comparing it to industry benchmarks can help identify areas for improvement in your cash flow management. By following tips such as extending payment terms, negotiating discounts, prioritising payments, and using technology, you can improve your DPO and overall accounts payable process.
About B2BE
B2BE delivers electronic supply chain solutions globally, helping organisations to better manage their supply chain processes, providing greater levels of visibility, auditability and control. We’re driven by a passion for what we do, inspired by innovation, and underpinned by a wealth of knowledge. With over 20+ years of experience, the B2BE teams operate worldwide.
For more information, visit www.b2be.com.