The formula for calculating the days payable outstanding (DPO) metric is equal to the average accounts payable divided by COGS, multiplied by 365 days. The number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter. days payable outstanding formula The formula takes account of the average per day cost being borne by the company for manufacturing a salable product. The net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills.
If your business is struggling, a high DPO doesn’t indicate good credit and prudent cash management – it means you might not have the money to pay debts on time. You might operate in a niche industry where rapid repayment is expected, so your DPO should be judged on a relative, rather than absolute, basis. Or your suppliers offer early payment discounts, in which case a low DPO means you’re proactively saving money in the long run. Understanding why your business takes a certain amount of time to pay its bills and invoices, whether to vendors, suppliers, or other companies, can tell you a significant amount.
What is DPO? The DPO meaning
Therefore, a higher days payable outstanding (DPO) implies more near-term liquidity, i.e. increased amount of cash on hand. On the balance sheet, the accounts payable (AP) line item represents the accumulated balance of unmet payments for past purchases made by the company. If a company wants to decrease its DPO, a company can also regularly monitor its accounts payable to identify and resolve any issues that may be delaying payment to suppliers. A company can also more quickly resolve supplier payment problems if it has accurate and up-to-date records. A good or bad DSO ratio may vary according to the type of business and industry that the company operates in. That said, a number under 45 is considered to be good for most businesses.
It’s essential to choose KPIs that align with your business priorities. Use the information in the list above to help determine the accounts payable KPIs that are best for your team. United Fire, for example—providing maintenance, testing, and inspection for fire equipment at commercial businesses in Portland, Oregon—uses BILL Accounts Payable to track AP KPIs. The office manager uses BILL dashboards to see all the performance information he needs within 15 minutes, allowing him to track how the company is doing weekly or even daily. Checks sent to the wrong address also represent payment errors, as do duplicate payments—when invoices are paid twice by accident.
Key Takeaways
It results in accounts payable (AP), a key accounting entry that represents a company’s obligation to pay off the short-term liabilities to its creditors or suppliers. Beyond the actual dollar amount to be paid, the timing of the payments—from the date of receiving the bill till the cash actually going out of the company’s account—also becomes an important aspect of the business. DPO attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time. Days payable outstanding (DPO) is a useful working capital ratio used in finance departments that measures how many days, on average, it takes a company to pay its suppliers.
