Stretching supplier terms releases cash once. A supplier who prices the extra days back in costs EBITDA every year, and the buyer capitalises it.
Cash released by extending DPO is annual purchases divided by 365, times the days added. On an illustrative portfolio company buying 127.20 million a year, moving suppliers from 45 to 60 days releases 5.23 million of cash once, and with growth and the interest saved the move adds 7.97 million of equity at exit. But if suppliers recover their own cost of funding the extra 15 days through price, 0.41 per cent, the EBITDA lost is capitalised at the exit multiple and the whole gain is gone: the break-even price rise is 0.40 per cent.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Stretching payables is the working capital lever every new owner reaches for, because it needs no customer to change behaviour: a letter to suppliers, a new payment run, and the cash is in the account the next quarter. The arithmetic of the release is the same as for receivables, with one difference in the base. Payables are carried at cost, so a day of DPO is a day of purchases, not a day of revenue, as the cash conversion cycle shows.
The other difference is that the counterparty is paying for it. A supplier waiting 60 days instead of 45 finances 15 more days of its own sales, at its own cost of funds, and a supplier with any pricing power puts that cost back in the price at the next negotiation. A cash release happens once. A price rise is EBITDA lost every year, and a buyer capitalises it.
| Input | Value |
|---|---|
| Third-party purchases at entry | 120.0 |
| Growth in purchases a year | 6% |
| DPO at entry, target from year 1 | 45 to 60 days |
| Hold period | 5 years |
| Cost of the debt the cash repays | 8% |
| Tax rate | 25% |
| Exit multiple of EBITDA | 9.0x |
| Suppliers' cost of funding | 10% |
| Equity cheque at entry | 100.0 |
At entry, payables are 120.0 × 45 ÷ 365 = 14.79 million. All the cash released repays acquisition debt.
DPO = trade payables ÷ purchases × 365
Cash released = purchases ÷ 365 × (DPO after − DPO before)
In Excel: =Purchases/365*(DPO_new-DPO_old) for each year's gap, and =SUMPRODUCT(Gap_prior_year,Rate)*(1-Tax) for the interest saved.
| Year | Purchases | AP at 45 days | AP at 60 days | Gap | Interest saved |
|---|---|---|---|---|---|
| 1 | 127.20 | 15.68 | 20.91 | 5.23 | |
| 2 | 134.83 | 16.62 | 22.16 | 5.54 | 0.418 |
| 3 | 142.92 | 17.62 | 23.49 | 5.87 | 0.443 |
| 4 | 151.50 | 18.68 | 24.90 | 6.23 | 0.470 |
| 5 | 160.59 | 19.80 | 26.40 | 6.60 | 0.498 |
The year 1 release is 127.20 ÷ 365 × 15 = 5.23 million. As purchases grow, the longer terms keep funding part of the growth, so the gap reaches 6.60 million at exit, 1.37 million more. Interest saved on the prior year's gap at 8 per cent comes to 1.83 million before tax and 1.37 million after. The equity gain at exit is 6.60 + 1.37 = 7.97 million, 0.080 turns of money on a 100.0 million cheque, if suppliers do nothing.
Supplier's financing cost as a share of price = extra days ÷ 365 × supplier's cost of funds = 15 ÷ 365 × 10% = 0.41%
Cost to the equity = price rise × exit-year purchases × exit multiple + price rise × purchases over the hold × (1 − tax)
Break-even price rise = equity gain ÷ (exit-year purchases × multiple + total purchases × (1 − tax))
If suppliers pass on their full financing cost, 0.41 per cent of 127.20 million is 0.523 million of EBITDA in year 1 and 0.660 million in the exit year. At 9.0x that is 5.94 million of enterprise value, and the after-tax cash paid over the hold is another 2.21 million. Total 8.15 million against a gain of 7.97: the programme destroys 0.18 million. The break-even price rise is 0.40 per cent, 98 per cent of what the suppliers' own funding costs them.
The cash is real, but its value depends entirely on who keeps the financing cost. The company saves 8 per cent before tax on the cash and gets no multiple on the saving; the supplier prices the same days at its own 10 per cent, and every point of that is capitalised by the next buyer. Full recovery breaks even at a supplier cost of funds of 9.78 per cent: suppliers funding below that leave the programme value-creating even if they reprice in full, suppliers funding above it turn full recovery into a loss, and partial recovery keeps part of the gain, as the table shows.
| Pass-through | Price rise | EV lost | Cash lost | Net effect |
|---|---|---|---|---|
| None | 0.000% | 0.00 | 0.00 | 7.97 |
| A quarter | 0.103% | 1.48 | 0.55 | 5.93 |
| Half | 0.205% | 2.97 | 1.11 | 3.90 |
| All of it | 0.411% | 5.94 | 2.21 | −0.18 |
| Days added | Equity gain | Break-even price rise | Full pass-through |
|---|---|---|---|
| 10 | 5.31 | 0.268% | 0.274% |
| 15 | 7.97 | 0.402% | 0.411% |
| 20 | 10.63 | 0.536% | 0.548% |
| 30 | 15.94 | 0.804% | 0.822% |
The gain scales with the days, and so does the supplier's cost, which is why the break-even stays just below full pass-through at every length of extension. The variable that moves the answer is the supplier's cost of funds. Small suppliers borrow dearly: at 15 per cent, full pass-through is a 0.616 per cent price rise, 8.91 million of enterprise value, and the programme loses 4.25 million. Stretch the large suppliers who fund cheaply and have least pricing power; leave the small ones, or put them on a supply chain finance programme priced on the buyer's credit.
Drift before exit. If DPO is back at 45 days in the exit year, the gap is repaid out of cash before the sale and the gain shrinks to the 1.37 million of after-tax interest. A price rise conceded to get the terms is rarely given back when the terms are.
Booking the release and not the price. The working capital report shows 5.23 million in year 1; the procurement report, a year later, shows suppliers asking for 0.4 per cent more, and nobody connects the two. In the illustration the full cost, 8.15 million, is 1.02 times the gain. The test before any terms programme is the break-even above: the price rise at which the equity effect is zero, compared with what each supplier group will realistically recover. The receivables side of the same calculation, with no counterparty price to pay, is in how much cash reducing DSO releases.
The book's working capital case, with the cash routed through the value creation bridge, is in the free workbook for this case.
Days payables outstanding is trade payables divided by purchases, or cost of goods sold where purchases are not reported, times 365. Payables of 14.79 million on 120.0 million of purchases is 45 days. Measure it on cost, not revenue, because payables are carried at cost; a day of DPO is worth a day of purchases.
Not directly. The cash released reduces net debt once and is not multiplied. If suppliers recover their financing cost through price, the EBITDA lost is multiplied: in the illustration a 0.41 per cent price rise costs 5.94 million of enterprise value at 9.0x plus 2.21 million of after-tax cash over the hold, 8.15 million in all, more than the 7.97 million the longer terms add to equity.
Its cost of funding the extra days: days added divided by 365 times its cost of funds. Fifteen more days for a supplier funding at 10 per cent is 0.41 per cent of price; at 15 per cent it is 0.616 per cent. Suppliers with pricing power will ask for it at the next negotiation.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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