What Is Days Payable Outstanding (DPO)?

Days payable outstanding, or DPO, is the average number of days it takes a company to pay vendors. A high DPO can be advantageous.

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Most companies pay for goods and services using credit and then receive an invoice from their vendors and suppliers. Days payable outstanding, or DPO, is the average number of days a company takes to pay its invoices. A high DPO can be a sign that a company is effectively managing its cash flow. However, an unusually high DPO could be a signal that a company is in trouble.

How to calculate DPO

DPO, or days payable outstanding, is a financial metric that shows the average number of days a company takes to pay its accounts payable. A company with a DPO of 30 takes an average of 30 days to pay its invoices. DPO can be calculated using one of the following two formulas:

Days payable outstanding (DPO) = (Accounts payable balance x Days in accounting period) / Costs of goods sold


Days payable outstanding (DPO) = Accounts payable balance / (Cost of goods sold / Days in accounting period)

Here’s what each of these terms means:

  • Accounts payable balance: The value of all goods and services that have been delivered to the company by suppliers and vendors using credit that the company hasn’t yet paid for.
  • Days in accounting period: A typical accounting period is a fiscal quarter or fiscal year.
  • Cost of goods sold: The sum of direct expenses for producing the goods and services a company sells.

Suppose a company has an average accounts payable of £60,000 during its fiscal year. The cost of goods sold during this period is £800,000. Because there are 365 days in the accounting period, the company has a DPO of 27.375.

What does days payable outstanding show?

A company with a high DPO takes longer to pay its vendors and suppliers than a company with a low DPO. There’s no clear-cut standard for what constitutes a “good” DPO. The average will vary based on a number of factors, including the industry and the company’s size and bargaining power.

In general, though, a high DPO is considered a positive. If a company has a higher DPO than its competitors, it’s often a sign that the company is effectively using its cash on hand for short-term investment opportunities. For example, if a company’s contracts with vendors state that invoices must be paid within 45 days and a company has a DPO of 10, the company could have earned 35 days’ worth of interest if it had held onto its cash. A high DPO can also indicate that a company has more favourable credit terms than its competitors.

However, if a company’s DPO is unusually high compared to similar businesses, it could be a sign that the company is having trouble paying its bills. If a company takes too long to pay its accounts receivable, suppliers may respond by restricting its credit terms.

A low DPO can be a sign that a company isn’t efficiently using its cash or that its vendors have tightened credit. But a low DPO isn’t necessarily bad. Sometimes, a company will pay invoices to improve relationships with suppliers or because suppliers offer a discount for early payment.

Days sales outstanding (DSO) is a related metric that shows the average number of days it takes a company to collect payments for invoiced goods and services. To maximise cash, a company should aim for a high DPO and a low DSO, which indicates that a company pays slowly but gets paid quickly.

Example of days payable outstanding

A company is measuring its days payable outstanding for the fiscal year. It has ending accounts payable of £50,000. Its cost of goods sold for the fiscal year is £500,000. Plugging in these numbers with the formulas previously discussed, you’d get:

(£50,000 x 365) / £500,000 = 36.5

£50,000 / (£500,000 / 365) = 36.5

The company’s DPO is 36.5, meaning it takes an average of 36.5 days to pay its vendor invoices. If a similarly sized competitor has a DPO of 40, it could be a sign that it’s using its cash more efficiently or that its vendors consider it more creditworthy, but a number of factors could be at play. Just keep in mind that context is key, and no single metric should be used to gauge the financial health of a company.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

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