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 that measures how long it takes a company to pay its invoices from trade creditors, such as suppliers. The formula to calculate days payable outstanding is:

formula for calculating days payable outstanding

Days payable outstanding is also referred to as number of days of payables.

BREAKING DOWN 'Days Payable Outstanding - DPO'

Days payable outstanding (DPO) evaluates how long it takes a company to pay its bills to its creditors, suppliers and vendors by relating the accounts payable to the number of days bills remain unpaid and the cost of goods sold (COGS). The ratio depicts how well a company is managing its cash flows given the number of days during an accounting period that it pays off its account payables.

Accounts Payable is a current liability account in the balance sheet. This usually means that money owed is expected to be paid back within 12 months. An increase in accounts payable is a source of cash as the company takes longer to pay its vendors and suppliers. A decrease in accounts payable signifies a use of cash as whenever a company settles its bills it constitutes a cash outflow which reduces working capital.

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. In this case, a high DPO is advantageous. A high days payable outstanding also comes with its disadvantages. If the company takes too long to pay its creditors, the creditors will be unhappy, and 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.

If a company's days payable outstanding is lower than the industry benchmark, then the company is not using its cash as long as its competitors in the industry. By paying bills earlier than necessary, the company remains at a disadvantage. 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 early payment discounts, getting hit with a price increase, or harming the relationship with the vendor.

Days Payable Outstanding Example

Let's examine the days payable outstanding for retail pharmaceutical companies CVS Health and Rite Aid. The information in the table below is from the annual report of both companies for fiscal year ended December 31, 2016 (CVS) and March 4, 2017 (Rite Aid). The cost of goods sold is found on the income statement. The number of days is 365 since we are reviewing the annual reports but note that the DPO can also be evaluated on a quarterly basis.

Company

Ending A/P (in millions)

Cost of Sales (in millions)

Number of Days

Days Payable Outstanding

CVS Health Corp

$7,946

$148,669

365

19.51

Rite Aid Corp

$1,614

$25,071

23.50

CVS Health pays its bills 19.5 days after receiving them, while Rite Aid takes an average of 23.5 days to pay its bills. In this case, Rite Aid is paying its accounts payable later than CVS, which means it gets to hold on to cash longer, which can be used for short-term investments and to increase working capital, which is current assets minus current liabilities.

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. 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.