Days Payable OutstandingDPO: Definition, Formula & Example

days payable outstanding formula

Overall, the DPO formula is a useful cash flow and working capital metric for businesses to measure payment cycles and monitor supplier relationships over time. But, it can also indicate that a business owner has shorter payments periods negotiated or worse credit terms. If your business is consistently paying bills quickly, that means profits are coming in and leaving with a quick turnaround. Others pay on an accounting period that is monthly, bi-monthly, or quarterly. Large companies often have more bargaining power and thus better DPO calculations. This is because they achieve more favorable credit terms with suppliers.

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If your company is slow to pay its bills then obviously relationships with vendors will suffer. Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers. It’s important to always compare a company’s DPO to other companies in the same industry to see if that company is paying its invoices too quickly or too slowly.

Days payable outstanding and the cash conversion cycle

The company may be able to maximize the benefit of those funds in the interim, offering competitive positioning. However, a high DPO may also indicate a struggle to manage funds properly if bills are consistently late. Jeremy is a finance writer experienced with a range of B2B solutions, including accounting, financial automation, and corporate financial management. He has a CPA license in the days payable outstanding formula Philippines and a BS in Accountancy graduate at Silliman University. Once you have calculated average A/P and COGS, you’re ready to calculate DPO―divide average A/P by annual COGS, then multiply by 365 days. In reality, the DPO of companies tends to gradually increase as the company gains more credibility with its suppliers, grows in scale, and builds closer relationships with its suppliers.

days payable outstanding formula

How many full-time or part-time employees are dedicated to your AP processes? This could indicate that the company has negotiated good terms with suppliers for early payment and is able to get a good discount for early payment. It could also indicate that the company isn’t investing back into itself to fund future growth. Now let’s take a look at one of its peers, Walmart, who has a DPO of 42.7, and the overall industry average of ~54 days.

Ratio of electronic invoices

We’ll use Ford’s end-of-year report for 2022 to find the company’s annual DPO calculation. Remember that we’ll need to find the CoGS on our income statement alongside our beginning and ending AP totals from the balance sheet. Theoretically, a DPO close to your typical payment terms is generally best. If your vendors typically give you 30 days to pay, then your DPO should be just under 30 days.

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