Days Payable Outstanding — DPO

A com­pa­ny’s aver­age payable peri­od. Days payable out­stand­ing tells how long it takes that com­pa­ny to pay its trade cred­i­tors, such as sup­pli­ers on an aver­age. Days payable Out­stand­ing is typ­i­cal­ly cal­cu­lat­ed either quar­ter­ly or yearly.

The for­mu­la to cal­cu­late Days payable Out­stand­ing is:

Accounts payable turnover ratio: Total pur­chas­es / Aver­age accounts payable

Days Payable Out­stand­ing (DPO) = 365 /Accounts payable turnover ratio

Or

Aver­age accounts payable X 365 / Total purchases

High Days payable Out­stand­ing is good for com­pa­ny as its funds company’s work­ing cap­i­tal to some extent. How­ev­er very high Days payable Out­stand­ing may destroy company’s cred­it­wor­thi­ness & com­pa­ny may not able to get good deals from their trade cred­i­tors. Also, because some cred­i­tors give com­pa­nies a dis­count for time­ly pay­ments, the com­pa­ny may be pay­ing more than it needs to for its supplies.

A good Days payable Out­stand­ing is about 30, how­ev­er it may vary by indus­try, and a com­pa­ny can com­pare its Days payable Out­stand­ing 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.