Metric of the Month: Days Payable Outstanding

In an article in CFO magazine, Michael Hinson explains how companies that put payment terms pressure on their suppliers often don’t realize the economic ripple effects of their actions. “Net 30″ is no longer the standard at many companies. Some of the “top performing” companies pay in 46 days or longer.

“Based on data collected, customers with clout are putting the pressure on suppliers to force longer payment terms, but it’s not necessarily because they are crunched for cash. In a separate APQC study, 67% of companies said they extended payment terms to improve working capital, despite already having good cash flow. Nearly 45% said they felt shareholder pressure to protect their balance-sheet profile. Thus, the decision today is more of a strategic one based on organizational context and strategy.”

Extended payment terms hurt the ability of suppliers to grow their businesses. When faced with the lure of working with a big customer who slow-pays, suppliers are caught between a rock and a hard place. These large accounts are often their lifeblood, and they often don’t have any leverage to push back on extended payment terms. However, some suppliers have “fired” their customers because the payment terms were unworkable. Some suppliers raise prices to make up the difference, but this increases costs up the supply chain. Others offer price discounts in exchange for faster payment terms.