Days payable outstanding

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​  Days payable outstanding ratio is used in accounting and finance departments that measures how many days, usually on average, it takes a company to provide payment to its suppliers.  The higher a company’s DPO, the longer it takes to pay its bills.

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  ​Days payable outstanding is calculated using the formula shown above.  To calculate DPO you would:

1. Multiply accounts payable by the number of days in your period. 
2. Then divide your answer by the cost of goods sold.

Example:

  Let’s say K&K Manufacturing has an average accounts payable of $200,000 over a 365 day period, and their cost of sales is $750,000.  To calculate the DPO we would:

1. Multiply $200,000 by the number of days in our period, which is 365. 
2. We would then divide our answer by our cost of sales which was $750,000.
3. This gives us a DPO of 97.33 days.

It should be noted that days payable outstanding is the opposite of days sales outstanding and is also a component of the cash-to-cash cycle time.  Why is this important? It tells us that companies can optimize or reduce their cash-to-cash cycle time by increasing DPO or by reducing DSO or DIO.
High or Low DPO?

• High DPO - A high DPO means the company is taking a longer time to pay its suppliers.  Of course, if a company takes longer to pay suppliers they are better able to invest cash for a longer period of time.  However, this may not be beneficial for a buyer supplier relationship.  For example, a company with a high DPO may be missing out on early payment discounts offered by suppliers.  It’s important to remember that DPO can vary quite a bit between industries and practices.  As such, there is no standard number that represents a ‘good’ or ‘bad’ DPO.
• Low DPO - Sometimes when a company's DPO is low it could be an indication that the company is not getting the best credit terms from suppliers or is not taking full advantage of the credit terms that may be available.  With that being said, this could be an opportunity to extend DPO and improve the company’s cash-to-cash cycle time. A low DPO on the other hand is not necessarily bad, as it may indicate that the company is paying suppliers early and taking advantage of early payment discounts.

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