Days Payable Outstanding (DPO)

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Description of Days Payable Outstanding. Explanation.

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Days Payable Outstanding (DPO)

Definition Days Payable Outstanding (DPO). Description


Days Payable Outstanding (DPO) is a financial performance ratio, which indicates how long a company is taking on average to pay its trade creditors.


Although the average DPO varies from one industry and region to another, a low DPO number shows that a company is paying its liabilities to suppliers quickly, whereas a high DPO number indicates that a company is receiving longer (and better) credit terms from its suppliers.


However, it should be noted that a high DPO number may also be a sign of liquidity problems of a company and therefore should always be challenged.


Calculation of Days Payable Outstanding. Formula

The DPO ratio is calculated as follows:


DPO = (Accounts Payable / Cost of Goods Sold in Accounting Period) x Days in Accounting Period

 

In this formula, the days in accounting period are typically 90 days for quarterly statements or 365 days for yearly statements.


DPO forms one part of the Cash Conversion Cycle, which represents the length of time that it takes a company to convert resource inputs into cash flows.


Days Payable Outstanding (DPO) is also known as Days Purchase Outstanding.


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