Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) is a financial metric that indicates the average number of days a company takes to pay its suppliers for purchases made on Credit. It is a measure of a company’s efficiency in managing its accounts payable and reflects how well the company is utilizing its Cash Flow.
Formula: DPO = (Accounts Payable / Cost of Goods Sold) × Number of Days
Examples:
- If a company has accounts payable of $100,000 and its Cost of Goods Sold for the year is $1,000,000, and it operates on a 365-day basis, the DPO would be calculated as follows:
- DPO = ($100,000 / $1,000,000) × 365 = 36.5 days
Case 1: A manufacturing company with a DPO of 45 days means it takes, on average, 45 days to pay its suppliers. This can indicate good Cash Flow management if the company has sufficient Revenue coming in within that time frame.
Case 2: A retail company with a DPO of 15 days might suggest it pays its suppliers quickly, potentially to take advantage of discounts. However, it could also indicate that the company is not leveraging its Cash Flow effectively.