Accounting ratio outstanding invoices11/28/2023 These retail giants have significant market clout, which allows them to negotiate better deals with their suppliers and pay as late as possible. In that case, the company will have to weigh the option of holding on the cash versus availing the discount.Ĭonsider the case of Wal-Mart and Tesco. The vendor might offer discounts for early payment. Ultimately, the DPO may depend on the contract between the vendor and the company. There are several factors at play which define the level of DPO, primary among them are:Ģ) Competitive positioning of a company – A market leader with significant purchasing power can negotiate favorable terms with its supplier so as to have a very high DPO.ģ) Competitiveness – if there are many suppliers with little differentiation than they will have to offer longer payment cycle to gain business from a client. Hypothetically, if the interest rate is 1 percent, then in 5 days the company can earn $1 (1% of $100 in 5 days) without even charging a margin to its customers (remember the company bought goods for $100 and sold the finished product for the same price). So the net impact of these transactions will be that the company can hold on to $100 for 5 days. In the above, over simplified example, we are assuming that Ted has to pay $100 in 10 days to his vendors and he will receive $100 from his customers in 5 days.
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