Days Payable Outstanding Benchmark

What is Days Payable Outstanding (DPO)?

Days Payable Outstanding (DPO) is a financial metric that measures the average number of days it takes a company to pay its suppliers and vendors for goods and services received. It indicates the efficiency of a company's accounts payable process and its management of cash flow.

What is a benchmark for Days Payable Outstanding?

A benchmark for Days Payable Outstanding represents a standard or reference point against which a company can compare its DPO performance. It helps assess whether a company's DPO is in line with industry norms or if it needs improvement.

The benchmark for DPO is typically derived from analyzing the DPO values of peer companies within the same industry. By examining the DPO of similar companies, an average or range of DPO values can be established, which serves as a benchmark. This benchmark provides a point of comparison for evaluating a company's payment practices and efficiency in managing its accounts payable.

The benchmark can be expressed as a specific number of days, indicating the average time it takes for peer companies to pay their suppliers, or as a range within which most companies in the industry fall. For example, the benchmark may be 30 days, meaning that the average DPO for peer companies is around 30 days. This benchmark can then be used to evaluate whether a company's DPO is higher or lower than the industry average and identify areas for improvement or potential opportunities.

How is the Days Payable Outstanding benchmark calculated?

The Days Payable Outstanding (DPO) benchmark is typically calculated by analyzing the DPO values of peer companies within the same industry. Here's a step-by-step process for calculating the benchmark:

1. Identify Peer Companies: Select a group of companies that operate in the same industry or sector as the company for which you want to calculate the benchmark. These peer companies should be similar in terms of size, business model, and supply chain dynamics.
2. Gather DPO Data: Obtain the DPO values for each of the peer companies. DPO is calculated by dividing the accounts payable by the average daily cost of goods sold (COGS). The accounts payable can be found on the balance sheet, while the COGS can be obtained from the income statement. Calculate the DPO value for each peer company using their financial statements or financial databases.
3. Calculate Average DPO: Add up the DPO values of all the peer companies and divide the sum by the number of companies in the group. This will give you the average DPO for the peer group.
4. Determine Benchmark: The average DPO calculated in the previous step represents the benchmark for Days Payable Outstanding. This benchmark can be used to compare against the DPO of the company you are analyzing.

 Formula : DPO = Accounts Payable * the number of days / Cost of goods sold

What are the benefits of benchmarking Days Payable Outstanding?

Benchmarking Days Payable Outstanding (DPO) offers several benefits for companies. Here are some of the key advantages:

1. Performance Evaluation: Benchmarking DPO allows companies to assess their own DPO performance against industry standards. It provides a basis for comparison and helps identify areas where the company may be lagging behind or performing exceptionally well. By understanding how their DPO measures up against benchmarks, companies can set improvement targets and track progress over time.
2. Supplier Relationships: DPO benchmarking helps companies understand how their payment practices compare to those of their competitors. It enables them to build better relationships with suppliers by aligning their payment terms. If a company's DPO is significantly higher or lower than the benchmark, it can impact supplier relationships. By striving for a DPO in line with industry norms, companies can maintain healthy relationships with suppliers and potentially negotiate better terms and discounts.
3. Cash Flow Management: Benchmarking DPO provides insights into a company's cash flow management. By comparing their DPO to the benchmark, companies can identify opportunities for optimizing working capital. For example, if a company's DPO is lower than the benchmark, it may indicate room for improvement in extending payment terms to suppliers and thereby conserving cash. On the other hand, if the DPO is higher than the benchmark, it may suggest potential inefficiencies in the accounts payable process, which can be addressed to enhance cash flow.
4. Industry Competitiveness: Benchmarking DPO helps companies gauge their competitiveness within the industry. If a company's DPO is better than the benchmark, it may indicate more efficient operations and better cash flow management. This can provide a competitive advantage by demonstrating the company's ability to effectively manage its working capital and allocate resources strategically.
5. Performance Improvement: By comparing DPO against benchmarks, companies can identify areas for improvement and implement strategies to enhance their DPO performance. This may involve streamlining accounts payable processes, negotiating favorable payment terms with suppliers, implementing technology solutions for invoice processing and payment automation, or adopting best practices observed in peer companies with superior DPO performance.

Where can I find Days Payable Outstanding benchmarks?

Days Payable Outstanding (DPO) benchmarks can be obtained from various sources. Here are some places where you can find DPO benchmarks:

Financial Databases: Financial databases such as Bloomberg, Capital IQ, FactSet, or Reuters Eikon provide financial information and metrics for companies, including DPO. These databases may offer industry-specific benchmarks or aggregated data for comparative analysis. Subscription or access fees may apply to use these databases.

Industry Reports: Industry-specific reports and publications often include benchmarking data, including DPO benchmarks. These reports may be published by market research firms, industry associations, or consulting firms. Examples include reports from Deloitte, PwC, McKinsey, or industry-focused research organizations.

Consulting Firms: Consulting firms that specialize in financial analysis, supply chain management, or industry-specific advisory services may provide benchmarking data, including DPO benchmarks, as part of their research or consulting engagements. Consulting firms often have access to proprietary databases and industry-specific expertise.

Professional Organizations: Industry-specific professional organizations, trade associations, or regulatory bodies may publish reports or studies that include benchmarking data for various financial metrics, including DPO. These organizations may conduct surveys or compile data from their members to create benchmarks.

Market Research Firms: Market research firms that focus on specific industries or sectors may provide benchmarking data, including DPO benchmarks, in their reports or databases. These firms gather data from multiple sources, analyze industry trends, and publish reports that include benchmarking metrics.

HighRadius offers autonomous solutions that help streamline and track your accounting, accounts receivable management, and treasury operations.