Days Payable Outstandings

Days payable outstanding (DPO) is a calculation of the average time (in days) for a company to pay bills and invoices to its creditors (suppliers, vendors, or financiers). It is a measure of the efficiency of a company's cash flow management. It is calculated as a ratio per quarter or per year.

The higher the DPO, the more time a company has to pay bills. The more time, the longer the company can keep available funds. The company gets an opportunity to use the funds more efficiently to make a profit.

COGS = Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory

DPO calculation

To calculate DPO for a given period, it is necessary to know the Cost of Goods Sold (COGS) and Accounts Payable (AP). Both of these calculations are an indicator of cash outflows.

Accounts payable is the debt sum. A company needs raw materials, supplies, and other resources to produce goods or services. Suppliers provide these purchases on credit, which must be paid later.

Production also includes expenses for utilities (e.g., electricity) and employee salaries. These costs are included in the COGS and are identified as purchasing and production costs.

Periods are categorized into a year (365 days) and a quarter (90 days). The formula takes into account the company average per day cost for producing a good or service. The average number of days to pay the company's debts after receiving invoices is the net factor. Payments outstanding are shown in the numerator.

There are 2 formulas for calculating DPO (depending on the used type of accounting). In the first formula, the accounts payable amount is the DPO value as of a certain date. That is, the figure "at the end of the fiscal year/quarter ending September 30" (the end of the accounting period).

In the second formula, the DPO for a certain period is the average of the initial AP and final AP. Both formulas represent COGS without changes.

Special Considerations

Companies in different industries have very different DPO ratios.  Each industry calculates its own average DPO and companies in that industry compare their DPO to it. This is to understand how quickly or slowly a company pays its suppliers. Industries, regions, seasons, and the overall economy have a strong influence on the DPO of any industry. Because of these influences, DPO can be very different, even within the same company.

The period of time for converting resources into sales and cash flow realization is also important. This value is called the cash conversion cycle (CCC). To calculate it, it also requires DPO. CCC tracks a company's entire cash conversion cycle, while DPO tracks only its accounts payable. First, the cash goes into inventory. Then, it goes into expenses and accounts payable. And after that, it goes into sales and accounts receivable. In the final step, they go back to cash reserves.