Days Payable Outstanding - DPO

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What is 'Days Payable Outstanding - DPO'

Days payable outstanding (DPO) is a company's average payable period. Days payable outstanding tells how long it takes a company to pay its invoices from trade creditors, such as suppliers. DPO is typically looked at either quarterly or yearly.

The formula to calculate DPO is written as: ending accounts payable / (cost of sales/number of days). These numbers are found on the balance sheet and the income statement.

BREAKING DOWN 'Days Payable Outstanding - DPO'

Companies must strike a delicate balance with DPO. The longer they take to pay their creditors, the more money the company has on hand, which is good for working capital and free cash flow. But if the company takes too long to pay its creditors, the creditors will be unhappy. They may refuse to extend credit in the future, or they may offer less favorable terms. Also, because some creditors give companies a discount for timely payments, the company may be paying more than it needs to for its supplies. If cash is tight, however, the cost of increasing DPO may be less than the cost of foregoing that cash earlier and having to borrow the shortfall to continue operations.

Most companies’ DPO is about 30, meaning that it takes them about a month to pay their vendors. DPO can vary by industry, and a company can compare its DPO to the industry average to see if it is paying its vendors too quickly or too slowly. If the industry standard is 45 days and the company has been paying its invoices in 15 days, it may want to stretch out its payment period to improve cash flow, as long as doing so won’t mean losing a discount, getting hit with a price increase or harming the relationship with the vendor. DPO can vary significantly from year to year, company to company and industry to industry based on how well or how poorly the company, the industry and the overall economy are performing.