Are you selling goods or services to one of the big U.S. companies listed in the table at the end of this story?
If you haven’t been paid yet, you may want to check how long they have owed you for the stuff your company supplied them. That’s because these companies have been taking a long time paying creditors lately, according to the DPO metric.
Data provided to CFO by S&P Capital IQ shows that 27 large, publicly held companies are at or near the top of their industry for days payable outstanding (DPO) — an accounts-payable metric that represents the average number of days a company takes to pay outstanding invoices.
Further, DPO at these companies is at or near its highest level of the last 12 financial quarters. (Companies had to satisfy both criteria to be included in the list.) These companies’ DPO measures ranged from 75 days to more than a year. (See table, “Taking Longer to Pay,” at the end of story.)
A relatively high DPO can be a positive for a company trying to optimize its working capital. The company is able to deploy cash to other uses for an extended period — cash that otherwise would have had to be paid immediately to a supplier.
But too high a DPO number can indicate a company undergoing liquidity issues or other financial distress. “DPO is a tool the CFO can play with a little bit to boost working capital by slowing down payables,” said Henry Ijams, managing director of PayStream Advisors, a financial operations research and consulting firm. “For each dollar the company doesn’t pay out to suppliers it is getting a free loan.”
With increased automation of accounts-payable departments, many companies are using a bit of financial engineering that Ijams calls “payables management by design.” They are paying different segments of suppliers on different terms, depending on how strategic the supplier is to the business as well as the supplier’s financial condition.
“If a strategic supplier is smaller or weaker, I don’t want to say my standard terms are 90 [days,]” says Ijams. “The supplier might not be able to deliver goods because it is short on cash. I want to make sure it has the money when it needs it.”
In some industries, companies lengthen their DPO to match the cash coming in. They strive to get DPO in line with DSO, days sales outstanding. (DSO is how long it takes to collect revenue from a customer after a sale has been made.)
In addition, some large industrial companies just have tremendous amounts of leverage. They can pay their nonstrategic suppliers — including lawyers, professional services firms and consultants — on lengthier schedules because suppliers want to do business with them.
But there are definite downsides to ab accounts-payable performance that’s outside the norm for a company’s industry. “The risks are that [vendors] will charge more for their products, won’t ship to you as fast and they may put the company on credit hold,” says Ijams. “They also might be less responsive to you in a competitive market — they will take care of the customers that treat them better.”
Given that many companies are sitting on hordes of cash and the cost of capital is low now, “you would wonder why a company has a high days payable outstanding,” Ijams says.
Almost all of the companies CFO contacted for this story did not respond to emails and phone calls about their DPO performance.
However, Advance Auto Parts, an automotive retailer, released the following statement to CFO: “Consistent with other retailers in our industry, Advance has successfully negotiated longer payment terms with its vendors. We do not discuss specifics around these terms and the programs we have in place with our vendors,” the company said. “We have consistently disclosed that the negotiation of extended payment terms is a priority which enables us to grow our inventory while preserving working capital.”
Most of the companies on the list appear to be in solid financial health. But eight of them did have negative net income in their last reported financial quarter, including struggling retailers Barnes and Noble and Best Buy.
Suppliers to these companies should also be aware that there are sometimes anomalies that affect DPO calculations. DPO is a balance-sheet measure and therefore only a snapshot in time. “A company could have just purchased something, like an extra amount of inventory at the end of a quarter, and that’s going to distort the figure — make it look like DPO is higher” says Ijams.
On the flip side, a company with low DPO is not necessarily paying every supplier’s invoice promptly. The metric can hide that while a company is paying strategic suppliers in a short time frame, it is taking advantage of longer terms with other suppliers.
The latest CFO/REL Working Capital Scorecard, published in June, showed that working capital performance among U.S. public companies has improved only marginally the last two years. In general, therefore, U.S. companies are not lengthening their payment terms — if they can help it.
“During the recession companies did a lot of extending payment terms; now it’s at a point where they don’t have that much leverage, and suppliers are pushing back,” says Prathima Iddamsetty, senior manager of REL Consultancy, a division of The Hackett Group. “The opportunity to attain a higher DPO has shrunk.”
The S&P Capital IQ data included only companies that have a total enterprise value (market capitalization plus interest-bearing debt plus preferred stock minus excess cash) of $1 billion or more.