Every year, Ardent Partners publishes several benchmark studies into the accounts payable (“AP”) marketplace. One of those is the annual research effort into the state of business-to-business (“B2B”) payments, called “The State of B2B Payments 2015: Emerging Business Value” this year, which Ardent is proud to announce is now available. The report captures the perspectives, experience, and accomplishments of more than 200 AP and finance leaders, as well as examining the trends affecting the marketplace and offering recommendations for improvement. The full report is available for download here.
One of the perspectives captured in the report is how satisfied AP teams are with their days payable outstanding (“DPO”), which is a key measure of financial health. Financial and stock analysts, along with members of the investor class, frequently use DPO to evaluate performance trends and a company’s financial health. DPO at its most basic is a measure of how long it takes buyers to pay their suppliers. The ideal DPO, in most cases, is one that is in line with an enterprise’s direct competitors as well as their market segment at large.
Analysts and investors use this industry-average DPO as a baseline to benchmark the company’s own number against. This is because a DPO measure significantly shorter or longer than a market segment’s average can be seen as a sign of financial difficulty. A significantly shorter DPO means the enterprise is paying invoices the instant money is available, which may mean they do not have a good cash flow.
A longer DPO, on the other hand, is generally seen as stronger from a financial health standpoint, but excessively long DPOs could mean money is tied up and not easily freed to pay suppliers. Additionally, a longer DPO, while good for the enterprise’s cash management, can impugn a supplier relationship and result in unfavorable contract terms the next time out—assuming the supplier is willing to do business again in the first place. Paying suppliers electronically can alter this paradigm, but not with a direct impact on DPO measures. Rather, electronic payments (“ePayments”) allow for more control.
Visibility, Precision, and Control: The DPO Impact of ePayments
Automating supplier payments has two primary advantages: increased visibility into payment data and precision scheduling. As a result of these two capabilities, ePayment solutions can help enterprises more effectively manage DPO than was ever possible with manual, paper-based processes. To start with, increased visibility gives AP the opportunity to better determine which early payment discounts to try for, as well as making it easy to find out whether a supplier received payment. More visibility into payment data can achieve this through offering up more data points for AP and other stakeholders (e.g., Treasury) to examine upcoming payments and make a decision on pursuing discounts.
Precision scheduling, on the other hand, allows for AP to schedule a payment for a specific date and time, ensuring that the payment will be delivered to the supplier precisely when the AP team wants it to be. This means that AP no longer has to rely on the postal system to deliver a paper check, thus using the “float” of a check being mailed as a DPO management tool, and wonder whether or not the supplier received payment. More to the point, however, is that AP can schedule payments at a time that maximizes DPO while also making the most of financing options like supply chain finance and dynamic discounting. Along with increased visibility, this injects a level of nuance into DPO management that did not previously exist with manual payments.
Greater DPO Control with ePayments
It bears mentioning that ePayments, while faster than paper checks, do not have any impact on DPO that AP does not want. What ePayments do, rather, is allow for greater flexibility in paying suppliers. No longer does the AP team have to wait days or weeks for a supplier to receive payment through the mail, or wonder whether the payment amount was correct. The increased data visibility inherent in ePayment solutions, as well as the precision scheduling and payment accuracy, can make for more effective DPO management in the short- and long-term equally.
This presents the opportunity for AP to collaborate with Treasury and the finance team on how best to manage supplier payments, which can help modulate the enterprise’s DPO with much greater control than possible with manual processes. This also allows AP to showcase its strategic value to the wider enterprise, particularly given the importance investors and analysts place on DPO and other measures of financial health.
Final Thoughts
More than 60% of payments are now electronic, according to Ardent’s 2015 ePayables survey, which means that payment strategies must evolve to include ePayments. This also extends to managing DPO, something which ePayments can assist with and—in some cases—even simplify through increased visibility and precision scheduling. Payment automation thus allows for streamlined business processes and more control over the enterprise’s days payable outstanding metric. Greater control over DPO can allow for a more nuanced payment strategy and, in the long term, a financially healthier enterprise.
Download the B2B Payments 2015 benchmark report here to find out more about how ePayments help manage DPO and the state of the B2B payments marketplace today!
Check out these related articles for more:
B2B Payments 2015: The Top 3 Payment Challenges Facing Accounts Payable
B2B Payments 2015: The Importance of Payment Visibility
Ardent’s Chief Research Officer Discusses New “State of B2B Payments 2015” Report (Video)
B2B Payments 2015: The Emerging Business Value of Electronic Payments
Ardent’s “The State of B2B Payments 2015: Emerging Business Value” is Now Available
