What Is DPO?
Days payable outstanding (DPO) refers to the average number of days a company takes to pay its expenses (e.g. bills, invoices) to accounts payable. For example, if a company has a DPO of 35, this process requires 35 days.
Note: Some companies calculate DPO for each year or each fiscal quarter.
Days Payable Outstanding Formula
Days payable outstanding (DPO) is the ratio of payables to the daily average of cost of sales.
The DPO ratio formula is:
Days Payables Outstanding = Accounts Payable/(Cost of Sales/360)
Company XYZ is a department store. Its cost of goods sold (COGS) is $10,000,000 this year, and the balance sheet shows $7,000,000 of payables.
We can calculate Company XYZ's DPO this year = $7,000,000/($10,000,000/360) = 252 days.
Last year, Company XYZ had $6,000,000 of COGS. If the balance sheet showed $4,000,000 of payables, then Company XYZ's DPO last year = $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.
How Accounts Payable Affects DPO
Accounts payable (A/P) is a liability which is why it appears on the balance sheet. More specifically, it’s a current liability which means 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 cash which reduces the company's working capital. When accounts payable or DPO go up, this is considered a source of cash because the company is taking longer to pay its invoices (and is therefore not using cash as quickly).
Accounts payable is an important factor in any company's working capital. If it's too high, the company may soon be struggling to find the cash to pay its bills. Likewise, if it's too low, the company may be unwisely directing its cash toward paying the bills too soon (rather than investing that cash in the business instead).