DPO - Significantly optimising cash flow by changing the focus - mini-series (Part 2)
This is the second post in the three-part series on cash flow optimisation in manufacturing and FMCG companies. Part 1 covered inventory and Days on Hand. Here, we focus on supplier payments - Days Payable Outstanding, or DPO. Part 3 will close the series with Days Sales Outstanding.
A personal note on where I learned this
I learned cash flow management from the ground up early in my career, and I will always be grateful to the people at Ford who taught me. We used to joke that Ford was an accounting firm with a very large car park.
There was real history behind that joke. After the Second World War, Henry Ford II hired a group of Army Air Force veterans - Robert McNamara among them, later US Secretary of Defence - to modernise the company. These "Whiz Kids" reformed Ford with contemporary planning, organisational, and financial control systems that left a permanent imprint on the business. Many credit this transformation as one reason Ford did not need a government bailout during the 2008 subprime financial crisis, unlike several of its competitors.
What got lost in the decades since is instructive: the Whiz Kids' lesson embedded itself in the finance function and largely stopped there. The operational dimension - the understanding that every function, every business unit, every region was part of a financial machine whose health depended on their daily decisions - gradually faded. Cash flow became a finance metric rather than an operational discipline. This series argues that reversing that is where the real opportunity lies.
Why DPO deserves operational ownership
External materials and services are the largest cost block in most product-based companies, typically representing 40 to 80% of revenue, depending on the industry. The cash flow leverage in payment terms optimisation is therefore significant. Unlike inventory, where improvement is largely within your own control, DPO requires two to tango - you and your suppliers. What prevents companies from dancing well with their suppliers is almost never a shortage of goodwill on either side. It is process failures that burn cash unnecessarily on both.
From experience across multiple industries, the most common DPO failure modes look like this. Negotiated payment terms get lost in translation between procurement and accounts payable. Payment standards exist on paper but are not consistently applied. Local and global payment benchmarks are neither known nor tracked. Buyers and accountants are not trained or incentivised across the full procure-to-pay process. Contracts and escalation paths are not standardised. Global Terms and Conditions - which make contractual life easier for everyone - are simply missing. Supplier and market financing schemes are available but unused. Accounts payable has no electronic data interchange with the supply base because procurement never made it a contract requirement. Payment term complexity has been allowed to proliferate unchecked - the highest count I personally encountered in one company was 467 different payment term variants, which made meaningful management impossible. And suppliers request shorter payment terms because they do not trust that they will be paid on time - a rational response to routinely late payments caused by complex invoice routing and approval processes.
Most supply chain readers will recognise several of these in their own company. Some will recognise all of them.
Ten questions to assess the current state
Are Cash Conversion Cycle metrics linked to the compensation of business management?
Have your payment terms policies been reviewed in the last five years, accounting for the significant changes in interest rates and inflation that have occurred across global markets?
Do you have minimum payment term thresholds for procurement contracts, and are they tracked?
Do you have standard payment terms across all businesses, with appropriate adjustments for local norms (Italy versus Germany versus the US versus India, for example)?
Do you measure the gap between contractually agreed payment terms and the actual timing of payments by accounts payable?
Do you have clear, accessible guidance on payment terms in your supplier-facing communications - and can suppliers actually find it?
Do you provide at least monthly automated reports to the Treasury function on outstanding payments by currency and period, to support hedging?
Are buyers trained to negotiate payment terms as a normal part of supplier contract discussions?
Do your procurement and accounts payable teams align on the ERP payment term fields - all eight to ten of them, which differ across functions in most systems?
Bonus: Do you have a supplier financing scheme in place?
A clear yes to most of those means DPO is being managed properly. If most are “no” or “unclear”, the opportunity is material, and the calculation below gives you a starting figure.
Calculating the size of the prize
Divide your total annual external spend by 220 - the approximate number of working days per year. That gives you your daily DPO cash flow figure.
Set a target average payment term. Depending on your supply footprint and industry, a well-run operation targets an average of 70 to 95 days across the supply base.
Subtract your current average payment term from your target, and multiply by the daily figure. That is your cash opportunity.
For a company with USD 10 billion of external spend, a 10-day improvement in average payment terms generates USD 450 million of additional cash on hand. Even a conservative improvement of five days is meaningful at that scale. For companies with lower spend volumes, the calculation scales proportionally - run it for your own numbers and the result tends to concentrate minds effectively.
Note for the financially precise: the full GAAP DPO definition includes accounts payable, COGS, and inventory components that I have left aside here. The simplified version above is sufficient to build a credible business case for procurement and operations engagement. Finance colleagues can run the complete version of the books.
Setting up the programme
The timeline is 6 to 12 months - shorter than most cash flow programmes because the changes are primarily procedural rather than structural. The board sponsor should be the COO rather than the CFO, for the same reason argued in Part 1: to shift ownership of this metric to operations. The joint lead sits with the Head of Procurement and the Head of Accounting - a shared target is essential to prevent the two functions from optimising against each other.
Weekly task force with clear objectives, monthly board-level reporting with clean output metrics: DPO trend, number of suppliers renegotiated, total spend and country coverage as a percentage. Progress is visible quickly when the work is done properly, which helps sustain momentum.
On training: procurement and accounts payable staff need to be developed together on the procure-to-pay process literacy. Procedures need updating, General Terms and Conditions need standardisation, and ERP payment-term fields need to be aligned across functions. None of this is technically complex - it is discipline and coordination.
On digitalisation: the opportunity is significant, and the tools are well established. No contractual payment term should ever be missed in accounts payable; no late payment should go undetected; average payment terms by order should match average invoice terms automatically. Power BI, Tableau, Looker, Qlik, and SAP Analytics Cloud all do this well. Process mining, as covered in an earlier post, is particularly effective at surfacing loopholes in the procure-to-pay process that manual review misses.
Watch out for
Pushback will come from both sides. Procurement teams sometimes use extended payment terms as a negotiating lever against price reduction, which should be the exception, negotiated case by case, not an informal standard practice. Accounts payable teams are often measured on "payment on time" metrics that do not align with the actual contractual terms, creating a gap between what was agreed and what is tracked. Surfacing this misalignment is uncomfortable but necessary.
The right response when these gaps are found is to focus on fixing them rather than asking how they happened. Forensic retrospectives on legacy practices rarely produce more than defensiveness. What works is helping the teams improve and then celebrating the results together.
Stay safe. Be bold.
Daniel
The views expressed in this post are my personal professional opinions, based on research and publicly available information. They reflect analysis of industry trends and practices, not assertions of fact about specific companies or individuals. Nothing in this post constitutes legal, financial, or investment advice.
