How FDD analysts read accounts payable and DPO: spotting payables stretching, aged and overdue balances, reverse factoring, and the impact on net debt and NWC.
Accounts receivable gets all the attention in due diligence - it is where the revenue-quality story lives, and where bad debts hide. But some of the most consequential value leakage in a deal happens on the other side of the balance sheet, in accounts payable. A target that has quietly stopped paying its suppliers on time can conjure cash out of thin air, flatter its net debt at the completion date, and hand the buyer a working capital position that will unwind painfully in the first weeks of ownership. The receivables ledger tells you whether customers pay. The payables ledger tells you whether the company is borrowing, interest-free and often invisibly, from everyone it buys from.
This article is about reading accounts payable the way a diligence analyst should: days payable outstanding (DPO) and what moves it, the tell-tale signs of payables stretching, aged and overdue balances as a debt-like item, the rise of reverse factoring and supply-chain finance, and how all of it lands on the net working capital peg and the net debt bridge. Payables are where a seller can make cash appear; your job is to work out whether it is real.
Accounts payable (AP) is the amount a business owes its trade suppliers for goods and services received but not yet paid for. It is a normal, healthy source of short-term financing - you receive stock in January and pay for it in March, and in the meantime the supplier is funding your operations for free.
The headline metric is days payable outstanding (DPO), which measures how long, on average, the company takes to pay its suppliers:
DPO = (Accounts payable ÷ Cost of sales) × Number of days in the period
A DPO of 45 means the business pays suppliers roughly six-and-a-half weeks after the cost is incurred. The metric is deceptively simple and hugely informative, because changes in DPO reveal cash-management behaviour that the P&L will never show you.
The critical insight for diligence is this: rising DPO releases cash, falling DPO consumes it. If a company pushes its average payment from 45 days to 60 days, it holds onto supplier cash 15 days longer - a genuine one-off cash inflow in the period the stretch happens. That inflow is not profit and it is not sustainable, but on a completion-accounts deal it can quietly reduce net debt at the reference date. Recognising engineered DPO movements is one of the highest-value things you do on the payables line.
The one-line rule of thumb: an unexplained jump in DPO just before the reference date is a working capital red flag until proven otherwise. Companies about to be sold have every incentive to stretch payables and pocket the cash.
You never judge DPO from a single number; you judge it from its trend and its drivers. A stable DPO of 50 days across three years is unremarkable. A DPO that climbs from 40 to 48 to 63 over the same window is a story you have to explain. There are benign explanations and malign ones, and separating them is the analysis.
Benign drivers. The company genuinely renegotiated better terms with major suppliers (get the evidence - signed terms, not assertions). The supplier mix shifted towards vendors who offer longer terms. Seasonality: a period-end that falls just after a big stock intake will show elevated payables for entirely mechanical reasons.
Malign drivers. The company is stretching payables - deliberately paying late, beyond agreed terms, to conserve cash. This is the classic pre-sale manoeuvre. It shows up as rising DPO with no change in contractual terms, often accompanied by a growing pile of overdue balances in the aged payables listing. Left unadjusted, it makes the cash flow and the completion-date balance sheet look better than the business can sustain.
To tell these apart you need the aged payables listing - payables bucketed by how overdue they are (current, 1–30 days, 31–60, 61–90, 90+). A healthy ledger is weighted to "current" and "within terms." A stretched ledger has a swelling tail of genuinely overdue balances. That tail is the evidence that the DPO improvement is engineered rather than earned, and it is exactly the kind of finding that belongs in the red-flags section of the report.
Numbers make the mechanism obvious. Consider a distributor with cost of sales of £60.0m. Watch how a DPO stretch manufactures cash - and what it means for the peg.
| Metric | FY24 (normal) | FY25 (reference date) |
|---|---|---|
| Cost of sales | £60.0m | £60.0m |
| DPO | 45 days | 60 days |
| Accounts payable (COGS × DPO ÷ 365) | £7.40m | £9.86m |
| Cash "released" by the stretch | - | £2.46m |
By pushing DPO from 45 to 60 days, the company holds an extra £2.46m of supplier cash at the reference date. On a completion-accounts deal, that £2.46m sits in the bank on the completion balance sheet and reduces net debt - flattering the price the seller receives. But it is not a durable position. Under new ownership, suppliers who have been paid late will demand a return to terms, and the buyer will have to fund the reversal - paying that £2.46m back out - in the first quarter of ownership.
The correct diligence response is twofold. First, normalise DPO to a sustainable level (say 45 days) when setting the working capital target, so the peg reflects a payables position the business can actually maintain rather than the stretched one at the reference date. Second, consider whether the overdue element is so far beyond terms that it is effectively debt rather than trade payables - more on that below.
| Treatment | Effect |
|---|---|
| Leave DPO at 60 days in the peg | Seller keeps the £2.46m benefit; buyer funds the unwind post-close |
| Normalise DPO to 45 days in the peg | Buyer protected; £2.46m stretch neutralised in the target |
| Reclassify overdue element as debt-like | £2.46m moves into the net debt bridge, reducing equity value |
Takeaway: a payables stretch is a transfer of cash from the buyer's future to the seller's price. Whether you neutralise it in the working capital target or pull it into net debt, you must not let it pass through as free cash.
Not all payables are ordinary trade credit. Where balances are materially overdue - well beyond agreed supplier terms - they stop looking like normal working capital and start looking like financing. The company is not managing its trade cycle; it is using suppliers as an unofficial overdraft.
The judgement call is whether to treat such balances as a debt-like item in the net debt definition rather than leaving them inside working capital. The logic mirrors the treatment of any debt-like item: if a balance represents financing that the buyer will have to settle in cash shortly after completion, and it is not part of the normal, sustainable trade cycle, it belongs in the net debt bridge where it reduces equity value pound-for-pound. Examples that frequently get pulled out of payables and into debt-like items:
This is where the payables analysis feeds directly into the EV-to-equity bridge. Every pound you reclassify from "normal trade payable" to "debt-like item" is a pound off the equity value the seller receives. Naturally, the seller's vendor due diligence will have argued the opposite - that everything in payables is ordinary trade credit - so expect this to be contested and make sure your evidence (the aged listing, the terms, the correspondence with suppliers) is airtight.
The most important modern development in payables analysis is reverse factoring, also called supply-chain finance (SCF) or confirming. It has felled large companies - Carillion and Abengoa are cautionary tales - and it is deceptively easy to miss because of how it is presented.
Here is the mechanism. A bank (or fintech) pays the company's suppliers early, on the company's behalf. The suppliers get their cash sooner; the company then repays the bank later, often on extended terms. Economically, the company has swapped a trade payable for what is effectively a bank borrowing - but under the accounting, the balance frequently stays classified within trade payables rather than debt. The result is a business that looks like it has a long, comfortable DPO and modest borrowings, when in reality it has a bank-funded payables programme that is a financing arrangement in all but name.
Why this matters for diligence:
Your job is to find it and, almost always, to treat the SCF-funded element as a debt-like item in the net debt bridge. Look for it in the financing notes, ask management directly whether any supplier-finance or confirming programme exists, and check for a bank counterparty sitting between the company and its suppliers. A DPO that is far longer than the industry norm, with no obvious commercial reason, is the classic tell that SCF is hiding in the payables line.
Payables sit at the intersection of the two most negotiated numbers in any deal: the working capital target and net debt. Getting the interaction right - and avoiding double-counting - is what separates a competent analyst from a dangerous one.
The discipline is a clean separation. Normal, sustainable trade payables belong in net working capital and are captured in the working capital target, which should be built on a normalised DPO rather than a stretched reference-date figure. Abnormal balances - the overdue tail, overdue taxes, SCF-funded amounts, deferred settlement plans - are pulled out and treated as debt-like items in net debt.
The cardinal sin is double-counting: reclassifying an overdue balance as debt-like while also leaving it inside the working capital position used to set the peg. If you do that, you penalise the seller twice for the same pound. The rule is that any balance you move into net debt must be stripped out of the working capital analysis, and vice versa. This reconciliation is central to how a completion accounts mechanism actually protects a buyer - and it is exactly the sort of thing that gets picked apart line by line in a disputed completion process. Whether the deal is locked-box or completion accounts changes when the payables position is fixed, but not the principle that stretched and financed balances must be isolated.
Payables scenarios test whether you understand that cash can be manufactured on the balance sheet, not just earned. A strong answer runs like this.
"The first thing I'd look at is the DPO trend across the review period, not just the reference-date number, because a rising DPO releases cash and a company about to be sold has every incentive to stretch its payables to flatter net debt. If I saw DPO jump - say from 45 to 60 days - right before the reference date with no change in supplier terms, I'd treat that as an engineered stretch: it's a one-off cash inflow that isn't sustainable, and the buyer will have to fund the unwind when suppliers push back to terms after completion. To evidence it I'd get the aged payables listing and look for a growing tail of overdue balances. Then I'd separate normal from abnormal. Normal trade payables go into the working capital target, but I'd build that target on a normalised DPO, not the stretched figure. The abnormal balances - the seriously overdue amounts, any overdue VAT or PAYE, and crucially anything funded through reverse factoring or supply-chain finance - I'd pull out and treat as debt-like items in the net debt bridge, because economically they're financing, not trade credit. The one thing I'd be careful about is double-counting: whatever I move into net debt has to come out of the working capital position, or I'd be penalising the seller twice for the same pound. The reverse factoring point is the one I'd flag hardest, because it's easy to miss and it understates real leverage."
That answer works because it identifies the manufactured-cash mechanism, uses the aged listing as evidence, keeps the working capital and net debt treatments cleanly separate, and volunteers the reverse-factoring risk unprompted - which is the detail that signals real deal experience.
Accounts payable is where a seller can make cash appear without earning it. A stretched DPO flatters the reference-date balance sheet and quietly reduces net debt; reverse factoring hides real borrowings inside the trade payables line; overdue taxes and supplier balances masquerade as ordinary working capital. The analyst's job is to read the DPO trend, demand the aged listing, isolate the abnormal and financed balances into net debt, build the working capital target on a sustainable payment profile, and never count the same pound twice.
Do that, and you protect your buyer from funding, in the first quarter of ownership, the very cash the seller was paid for at completion. On the payables line, the question is never "how much do they owe?" It is "how much of this cash is really theirs to keep?"
The Transaction Services Interview Programme (€119.99, one-time) includes a working-capital deep dive on payables - DPO normalisation, spotting pre-sale stretching, reverse factoring, and splitting trade credit from debt-like items in the net debt bridge. Enrol today.
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