Smart working capital management

Payment terms are a great area for leadership by procurement. But there are some pitfalls to avoid. What I'd like to do today is comment on the temptation to be preoccupied with DPO (days payable outstanding).

By ·

As we have discussed in the past, certain working capital improvements should be spearheaded by procurement professionals. Other working capital enhancements deserve the participation by procurement professionals. In the process, you can add real value to your company while demonstrating that you are able to drive strategic value across both cost-related and non-cost dimensions.

Payment terms are a great area for leadership by procurement. But there are some pitfalls to avoid. What I’d like to do today is comment on the temptation to be preoccupied with DPO (days payable outstanding).

Partly driven by their financial office, many procurement departments are pursuing objectives of extending DPO year after year. The objective is typically to better match DPO with DSO. In other words, you’re trying to balance the cash cycle time tied up in accounts receivable (waiting for your customers to pay you), with the cash cycle time contributed by supplier payment terms.

A single-minded focus on DPO extension can, however, be counterproductive. In particular, it can leave untested the willingness of suppliers to entertain aggressive discount payment terms in exchange for early payment by the customer.

In this credit-constrained environment, we have seen numerous examples of suppliers offering aggressive discount terms in order to better manage their own cash flow cycle. If your procurement department is focused solely on extending net payment terms, you’ll never uncover the potential for better discounts. It is better, and more valuable, to obtain the option of paying either discount or NET terms, at your company’s discretion. Then, based on your company’s finances and liquidity objectives, your Treasury department will have the flexibility to pay earlier and earn the discount (which flows directly to your bottom line), or pay on a net basis and hold on to your cash.

If you’re being measured against a simple DPO objective, suggest to the scorekeeper that you report DPO adjusted for discounts taken, and separately report the value added by your negotiation of better discount terms.

For related blog posts click here.

 


About the Author

Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]

Subscribe to Logistics Management Magazine!

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your entire logistics operation.
Start your FREE subscription today!

Article Topics

All Topics
Latest Whitepaper
Lead your organization through the driver shortage and over-the-road regulations.
Potential transportation disruptions are looming as increased over-the-road regulations are set to go into effect in 2017. Experts believe these regulations will further impact the already challenged driver pool as well as reduce driver productivity.
Download Today!
From the January 2017 Issue
Following LM tradition, we start off the New Year with our annual “Rate Outlook” cover story and subsequent Webcast
Moore on Pricing: The other TMS functional options
2017 Rate Outlook: Where are freight transportation rates headed?
View More From this Issue
Subscribe to Our Email Newsletter
Sign up today to receive our FREE, weekly email newsletter!
Latest Webcast
2017 Rate Outlook: Where are freight transportation rates headed?
Join our panel of top oil and transportation analysts for an exclusive look at where rates are headed and the issues driving those rate increases over the coming year.
Register Today!
EDITORS' PICKS
2017 Rate Outlook: Will the pieces fall into place?
Trade and transport analysts see a turnaround in last year’s negative market outlook, but as...
Logistics Management’s Top Logistics News Stories 2016
From mergers and acquisitions to regulation changes, Logistics Management has compiled the most...

Making the TMS Decision: Ariens Finds Just the Right Fit
The third time is the charm for this U.S. manufacturer on the hunt for a third-party logistics (3PL)...
Motor Carrier Regulations Update: Caught in a Trap
The fed is hitting truckers with a barrage of costly regulations in an era of scant profits....