Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / Why Your Suppliers Care About Your DPO
Transcript
- Lucas: Luna, I want to talk about a metric that almost no small business owner tracks, but suppliers absolutely do — Days Payable Outstanding, or DPO. Luna: DPO — that's how long a company takes to pay its bills, right? Lucas: Exactly. If a supplier gives you net-30 terms and you pay on day 45, your DPO is 45. It's a measure of how aggressively you hold onto cash. And in theory, a higher DPO is good for your own working capital — you keep the money longer. Luna: But there's a cost, I'm guessing. Lucas: There can be. I was looking at a mid-sized manufacturer — let's call them Precision Parts — that stretched their average DPO from 30 days to 75 days over about two years. Their cash balance looked great on paper. But then suppliers started pushing back. Some shortened terms to net-15. Others quietly added a 2 percent surcharge for late payments. One key supplier actually put them on a cash-on-delivery basis. Luna: That's brutal. Cash-on-delivery kills your cash flow planning. Lucas: Right. So Precision Parts had this 'free' float for a while, but it wasn't free. The suppliers effectively raised prices or reduced flexibility to compensate for the delayed payments. It's a zero-sum game if you're not careful. Luna: And this is especially dangerous in 2026, I'd imagine, because many small suppliers are still dealing with higher input costs from the inflation years. They can't afford to wait 75 days. Lucas: Exactly. Suppliers with thin margins — restaurants, independent manufacturers, wholesalers — they have their own bills to pay. If you stretch them, they either raise prices or enforce stricter terms. And in a tight supply chain, they might prioritize customers who pay on time. Luna: So what's a sensible DPO target? Is there a magic number? Lucas: No single number, but generally you want to match your own cash conversion cycle. If your customers pay you in 45 days, you probably shouldn't push DPO beyond 45 either, unless you have a specific reason. The real question is: are you stretching to survive or to optimize? Luna: And how do you negotiate better terms without burning the relationship? Lucas: That's the key. Instead of just paying later, some businesses offer something in return. For example, you could agree to a longer payment term but offer a small volume commitment. Or you use supply chain financing — a third party like a bank pays the supplier immediately, and you repay the bank later, usually at a lower rate than your supplier would charge. Luna: I've seen those platforms grow a lot in the last couple of years. It's like invoice factoring but from the buyer's side. Lucas: Right. And it keeps the supplier happy because they get paid fast. The buyer extends their DPO but pays a small fee to the financier. It's a win-win if the fee is less than the benefit of holding cash. Luna: But for a small business, that fee might eat into margins. So maybe the better play is just to pay on time and negotiate a discount for early payment? Lucas: That's the classic '2/10 net 30' — pay within 10 days and get a 2 percent discount. That's effectively a 36 percent annualized return, which is huge. If you have the cash, that's almost always better than stretching. Luna: Right. So the lesson is: know your DPO, know your suppliers' pain points, and negotiate transparently rather than just delaying payments silently. Lucas: Exactly. And one more thing — track your DPO trend over time. If it's creeping up quarter after quarter without a clear reason, that's a red flag. It could mean you're becoming dependent on float to cover operational gaps. Luna: That's a good diagnostic. Lucas, before we wrap, I want to mention something — if listeners found this episode useful and want to keep the show ad-free, they can support us at buy me a coffee dot com slash fexingo. Even a small contribution helps us keep these conversations going. Lucas: Yeah, it really does. We don't run ads — that's a deliberate choice — and listener support is what makes that possible. So if today was worth a coffee, that's the link. Now, back to DPO — one practical tip I'd add: communicate with your suppliers before you change payment patterns. If you know you'll need to stretch terms for a quarter, tell them why and when you'll revert. That preserves trust. Luna: That's so simple but so often overlooked. Suppliers are people too. They appreciate a heads-up. Lucas: Absolutely. And it can actually lead to better terms. I've seen cases where a buyer said, 'We're launching a new product line, can we do net-60 for six months, and then we'll go back to net-30 with a 10 percent volume increase.' The supplier agreed because the future commitment was clear. Luna: That's a negotiation, not a demand. So DPO is really a relationship metric, not just a cash flow one. Lucas: Exactly. And in 2026, with interest rates still relatively high — the Fed's benchmark is around 4.5 percent — holding cash has a real opportunity cost. But so does alienating your supply base. It's about balance. Luna: So measure your DPO, benchmark it against your industry, and have honest conversations with suppliers. That's the takeaway. Lucas: I'd add: also look at your payables aging report. If you have a significant percentage of invoices past due, that's a DPO issue and a relationship issue. Address it before it becomes a crisis. Luna: Great advice. Next week we'll talk about inventory turnover and how it connects to cash flow. Lucas: Looking forward to it. Thanks for listening, everyone.