For the past several years, SCDigest has performed analysis on the working capital data for the 1000 largest US companies compiled by REL, a Hackett Group company. Relative to payables, REL measures that metric in terms of Days Payables Outstanding (DPO), which measures how many day's worth of sales a company has in terms of payables. REL defines DPO as: Year-End Accounts Payable /(Total Revenue/365).
REL found that DPO was actually flat among across the 1000 public companies it follows, coming in at 32.3 days, the same as 2011. Average DPO was actually decreasing steadily from 2002 through 2008
and the start of the recession, falling over that time from 35.5 days to just 28.6. It then started to go the other direction after the great recession before flattening out the past two years, at levels still a couple of days shy of where this metric was in 2002.
REL believes companies in aggregate have substantial opportunity to improve working capital by increasing Days Payables Outstanding, finding for example that the top quintile (20%) had an average DPO level of 35.8 days, versus the median level of the entire company list of 24.7 days. It says the gap in DPO performance between leaders and average continues to widen each year. DPO is a unique and difficult metric, as suppliers facing extended payment terms are likely to raise prices to compensate for the late payments, mitigating the cash flow advantages from the longer terms.
The average DPO metrics for a few select industry sectors are as follows:
- Consumer packaged goods: 32
- Pharmaceuticals: 28
- Mass Merchants, Dept. Stores, and Club Stores: 26
- Chemicals and Gases: 31
- Apparel and Shoe Manufacturers: 28
Source: SCDigest