Days Payable Oustanding (DPO)
What it is:
How it works/Example:
For example, let's assume Company XYZ is a department store. If its cost of goods sold is $10,000,000 this balance sheet shows $7,000,000 of payables, then we can calculate that Company XYZ's DPO:
DPO this = $7,000,000/($10,000,000/360) = 252 days
Let's compare this with last , when Company XYZ had $6,000,000 of cost of goods sold. If the balance sheet showed $4,000,000 of payables, then Company XYZ's DPO last was:
DPO last = $4,000,000/($6,000,000/360) = 240 days
The increase in DPO indicates that Company XYZ is taking longer to pay for its suppliers.
Why it matters:
inventory account by $1,000,000 and increase its accounts payable by $1,000,000. When 60 days has passed and Company XYZ pays the invoice, it reduce by $1,000,000 and reduce its accounts payable by $1,000,000.
A/P is a , and as such, it appears on the . In particular, A/P is a current liability, meaning that the amount owed is expected to be paid within the next 12 months.
When accounts payable or DPO decrease, this is considered a use of , and as such, it reduces the company's working capital (defined as current assets minus ). When accounts payable or DPO go up, this is considered a source of because the company is taking longer to pay its invoices and thus not using as quickly.
Accounts payable is an important in a company's working capital. If it's too high, the company may soon be struggling to find the to pay the bills; if it's too low, the company may be unwisely directing its toward paying the bills too soon rather than enjoying the full grace period and that in the business instead. Changes in the DPO indicate which way this is trending and in turn how well management is retaining .