Is the use of SCF synonymous with improving DPO

1. Is the Use of SCF Synonymous with Improving DPO? For over a decade, supply chain finance (SCF) has given buyers and suppliers the ultimate opportunity to gain access to cash otherwise trapped in the cash conversion cycle. However, it’s a relatively common assumption that an SCF program can only function by rationalizing supplier payment terms to improve Days Payable Outstanding partly due to the historical marketing of such finance programs. But that isn’t really the case. In fact, these are two independent activities, and many organizations are using SCF to extend their DPO and get a longer paying term. In this article, we will discuss how improving DPOs have made it easier for buyers to get an extension. What is Days Payable Outstanding (DPO) ? The number of days a company has to wait before receiving payment for its products or services is called DPO. DPO is a metric that represents the time it takes for a company to be paid after the sale is completed. DPO is calculated by adding the number of days the product sits in inventory plus the days the product is in transit plus the number of days a customer takes to pay the invoice. Days payable outstanding is also known as average days to pay and represents the average time that a company has to wait to receive payment from its customers. The concept of DPO is to assess the cash flow and see how much time in the chain of production, sales, and payments customers take to settle their debts. In the chain of production and sales, a seller manages to keep the

2. operations moving in a coordinated manner and nothing gets stuck in the chain. But, in the chain of sales, customers take a lot of time in settling the accounts. That’s why DPO is calculated globally by considering inventory, transportation, and customer payment periods. How is a DPO Calculated and Why Do Buyers Need it? Let’s take an example to understand the working. When a supplier is paid, a portion of it goes to the manufacturing unit to get the production of goods done. After a few days, the goods are sent to the distributor and from there, a portion of the money goes to the retail stores where the product is to be sold. As you can see, the entire process requires time and hence, the DPO starts. In the above example, ● If the DPO is 5 days, it means the buyer will only get paid after 5 days. ● In such a situation, when the buyer is planning to pay the supplier, he or she will calculate the DPO based on the number of days the product will be kept in the inventory. ● The number of days the product takes to get transported to the distribution center, and the number of days the product needs to travel from the distribution center to the seller. Why do Buyers Want a Longer DPO and How it is a Risk There could be a number of reasons for a product seller to want a longer DPO. And these are the same reasons that a buyer may want to make the DPO shorter. The most common reasons are. Inventory Management: When the production gets delayed, retailers or wholesalers will buy more inventory to maintain the stock levels. This

3. causes some damages to the business by increasing the inventory and is a risk on the cash flow. So, when the buyers want a longer DPO, they plan to hold the payments to maintain their inventory levels and avoid any losses. - Cash Flow Management: When the product sales get delayed, the business owners need to hold the funds in the accounts. This is how cash flow works. However, when the buyers want a longer DPO, they plan to get more funds in the accounts to maintain their cash flow. How is a DPO managed by Buyers? When a DPO starts, it is important for the buyers to manage it adequately. Here are the most effective ways to do that. Revising Purchase Order Terms The first and easiest way to manage the DPO is by revising the purchase order terms. By doing this, the buyer can change the payment terms to make them longer. For example, if the DPO is 7 days and the buyer wants to make it 14 days, he can do it in the purchase order. Ordering from New Supplier If a product seller wants a shorter DPO, a buyer can ask him to change and make it longer. But, if the seller doesn’t want to change, the buyer can find a new supplier who will accept the terms. Making Use of Supply Chain Finance When the buyer is unable to find a new supplier and doesn’t want to change the terms in the purchase order, he can use SCF to make payment to the supplier. This is how SCF works. How Buyers are Getting an Extended DPO?

4. After quite a few tried and tested methods, buyers are getting an extended DPO in the following ways By Making Use of a SCF Program An SCF program allows a buyer to get an extended DPO by getting more time from the bank. This is done when the buyer borrows cash from the bank to pay it for his shipment. The buyer then repays this amount to the bank at a later date agreed upon by both the parties. By Increasing the Credit Limit for the Supplier In some cases, the seller can increase the credit limit for the buyer. This can be done by increasing the payment terms in the buyer’s credit application and making a note that the buyer will repay it in a higher amount. By Changing the Terms in the Existing Contract In some cases, the seller may change the terms in the existing contract. This can be done by increasing the payment terms and making a note that the buyer will repay the money in a higher amount. Conclusion SCF programs are the best way to manage the cash flow in the supply chain and get the best of it. They enable buyers to get an extended DPO by taking some financial risks. They are best suitable for importers who have to make payments to their suppliers who are overseas. There is a misconception that SCF programs can only function by rationalizing supplier payment terms to improve DPOs. But that isn’t really the case, and many organizations are using SCF to extend their DPO and get a longer paying term.