Days payable outstanding (DPO)

The formula

• DPO = d · AP / COGS

AP is the accounts payable at the end of the period, COGS the cost of goods sold during it and d the days in it. The share of a period’s purchases still unpaid, times the period’s length, is the average days a supplier waits.

A worked example

Payables of 90,000 at the end of a year in which the cost of goods sold was 730,000: DPO = 365 · 90,000 / 730,000 = 45 days. Suppliers are paid, on average, a month and a half after delivery. Turned round, paying in 30 days with the same purchases would leave about 60,000 outstanding.

Credit with a cost

Every day of DPO is a day the suppliers’ money works in the company instead of its own, which is why a long DPO lowers the cash conversion cycle. The credit is not free: suppliers price their terms, offer discounts for early payment that a slow payer forgoes, and in the end stop delivering. A DPO that climbs because invoices cannot be paid is a different thing from one negotiated.

Its place in the cash cycle

DIO + DSO − DPO is the cash conversion cycle: the days between paying for goods and being paid for them. DPO is the only one of the three that shortens the cycle.

Common mistakes

• Dividing by sales instead of cost of goods sold. Payables arise from purchases, which are at cost.
• Mixing periods. A quarter’s purchases need a quarter’s days.
• Counting all liabilities. DPO takes trade payables to suppliers, not loans or tax.

Frequently asked questions