However, if a company’s DPO is unusually high compared to similar businesses, it could be a sign that the company is having trouble paying its bills. If a company takes too long to pay its accounts receivable, suppliers may respond by restricting its credit terms.
A low DPO can be a sign that a company isn’t efficiently using its cash or that its vendors have tightened credit. But a low DPO isn’t necessarily bad. Sometimes a company will pay invoices to improve relationships with suppliers or because suppliers offer a discount for early payment.
Days sales outstanding (DSO) is a related metric that shows the average number of days it takes a company to collect payments for invoiced goods and services. To maximize cash, a company should aim for a high DPO and a low DSO, which indicates that a company pays slowly but gets paid quickly.