Days Payable Outstanding (DPO)

What is Days Payable Outstanding?

Days Payable Outstanding (DPO) is a financial metric that measures the average number of days a company takes to pay off its accounts payable. It is used to measure the cash flow efficiency of a business, as well as its ability to manage its debts.

Why Days Payable Outstanding is important

The Days Payable Outstanding metric is important because it helps financial managers and investors to understand the health of a business’s cash flow. It also provides an indication of how well a business is managing its accounts payable. A low DPO indicates that the company is paying its bills quickly, which is generally seen as a sign of financial strength.

How Days Payable Outstanding is calculated

The Days Payable Outstanding formula is calculated by dividing the average accounts payable balance by the total cost of goods sold (COGS), and then multiplying by the number of days in the period. The formula looks like this:

DPO = (Average Accounts Payable Balance) / (COGS) * (Number of Days in Period)

For example, if a software company has an average accounts payable balance of $1 million, COGS of $2 million, and a period of 30 days, the company’s DPO would be 15 days:

DPO = ($1 million) / ($2 million) * (30 days) = 15 days

How to improve Days Payable Outstanding

There are several ways to improve Days Payable Outstanding. One way is by negotiating longer payment terms with suppliers. Another way to improve the DPO is by offering early payment discounts, which can help to reduce the average accounts payable balance. Additionally, companies can reduce their DPO by making sure they have a well-organized accounts payable process in place.

Why investors value higher Days Payable Outstanding

Investors value companies with higher Days Payable Outstanding because it indicates that the company is managing its accounts payable efficiently. Companies with a higher DPO are able to free up cash flow and reduce their debt, which can lead to higher valuations on exit.

How Days Payable Outstanding relates to other financial metrics

Days Payable Outstanding is closely related to other financial metrics, such as Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO). DSO measures the average number of days it takes for a company to collect payment from its customers, while DIO measures the average number of days it takes to turn inventory into cash. Together, these metrics can help to provide an overall picture of a company’s financial health.

Sources

• Investopedia. “Days Payable Outstanding.” 

• Accounting Tools. “Days Payable Outstanding (DPO).” 

• Accounting Coach. “Days Payable Outstanding (DPO).” 

• The Balance. “What Is Days Payable Outstanding (DPO)?” 

• QuickBooks. “What Is the Days Payable Outstanding Ratio?”