What are Days Payable Outstanding? DPO Calculation Formula.

When to pay bills is a vital part of cash management. It’s a delicate balance, making it essential to manage days payable outstanding (DPO) carefully to avoid straining vendor relationships while still optimizing liquidity.

Most vendors and suppliers establish payment terms as part of their contracts, and fees or interest will accrue if those terms are not met.

However, there could also be savings opportunities. For example, a contract term like “2/10, net 30” means the supplier offers a 2% discount if payment is made within 10 days rather than the full 30-day payment window. If your DPO is much higher than this, your business might miss out on potential savings.

Let’s take a closer look at DPO and its role in optimizing cash flow, managing supplier relationships, and improving a company’s overall financial health.

What are days payable outstanding?

Days payable outstanding measures the number of days it takes an organization to make a payment for goods or services. As an indicator of working capital efficiency, DPO helps businesses understand how well they are managing their cash flow and obligations to suppliers.

Days payable outstanding formula.

The formula for calculating DPO is to determine what portion of your total Cost of Goods Sold (COGS) is in your AP account and multiply that by the average number of days to make payment. The most common days payable outstanding formula is to divide accounts payable by the COGS, and then multiply by the number of days in the payment period. The payment period is usually a one-year period or quarterly.

The final number shows the average number of days the company takes to settle its debts after receiving invoices.

Here’s an example. With the following data:

The days payable outstanding calculation would be:

How to calculate DPO.

Calculating DPO starts with knowing the essential elements of the formula:

Accounts payable: To produce a marketable product, a company needs to spend money on goods and services, including utilities. Accounts payable represent the total owed to suppliers for purchases made by credit. Simply put, the company has received the goods or services, along with the invoice, but has not yet made payment to the supplier or vendor.

The definition of accounts payable can take two approaches based on accounting practices. In one method, the accounts payable balance at the end of the period — such as the end of the fiscal year or quarter — is used to calculate DPO for that specific date.

In the second approach, the average of the opening and closing accounts payable balances is used to determine the DPO for a particular period. The COGS value remains the same for both methods.

COGS: The cost of goods sold represents the total direct costs associated with producing or acquiring the products that a company sells during a specific period, including materials, labor, and overheads.

Days: This is usually 365 (one year) or 90 days (one quarter). The number of days will typically correspond with the period for the data used to determine the average AP.

Why DPO matters to your business.

DPO represents the time between making a purchase and making a payment. A key point to understanding the importance of DPO is knowing that during that period, the cash belongs to the buyer and they can use it for other purposes in order to optimize cash flow. A higher DPO represents more liquidity because there is more cash on hand.

If companies could delay payments, most would do so to boost cash flow. However, a longer DPO can jeopardize vendor relationships.

Ultimately, buyer power often determines whether companies can extend payables, taking into account factors like order volume, frequency, and long-term relationships. Suppliers often agree to delayed payments when they rely heavily on a customer for revenue, whereas smaller customers may face restrictions or upfront payment terms.

How is days payable outstanding different from days inventory outstanding?

Another key cashflow metric is days inventory outstanding (DIO). As the name implies, DIO represents the number of days it takes a company to replace its inventory.

To calculate DIO, you’ll need the inventory balance (from the balance sheet) and COGS from the income statement. You then divide the average (or ending) inventory balance by COGS and multiply by 365 days.

A higher DIO means more cash is tied up in inventory, which reduces free cash flow and signals that the company is taking longer to sell its products. In contrast, a higher DPO improves cash flow by delaying payments to suppliers.

What are some industry averages for DPO?

Should a DPO be high or low? There’s no universal answer. DPO benchmarks vary by industry and cashflow needs. RiskConcern lists some average DPOs by industry.

• Advertising agencies: 144.3
• Health information services: 44.3
• Software infrastructure: 112.59
• Computer hardware: 79.67

DPO example.

You single-handedly oversee procurement for a SaaS company and want to make sure DPO is optimized for cash flow. To do this, you start by gathering information:

You then divide Accounts Payable by COGS:

Then you multiply that number by 365. The result is your DPO, 73 days, which means it takes an average of 73 days to pay your suppliers.

Tips for improving your DPO.

No matter what your target DPO is, you can take action to improve it in ways that benefit your organization. Here are some tips.

Automate payments: With the best AP automation tools, you can schedule, track, and process invoices without manual work or the risk of human error or fraud. Additionally, payment automation allows you to better manage your cash flow by aligning payments with your cash inflows and outflows, and capitalizing on available discounts or incentives.

Negotiate the best payment terms for you: Here’s where savvy vendor management comes into play. A user-friendly self-serve vendor portal helps facilitate communication and maintain positive relationships. The ability to have historical data readily available also leads to informed negotiations. You might notice, for example, that your organization qualifies for a discount due to the number of seats on a software license or that you can leverage a record of timely payments.

Prevent paying duplicate or fraudulent invoices: AI-driven invoice capture and approval workflows provide the visibility and control necessary to protect against invoice fraud or accidental payment.

Days payable outstanding FAQ.

Is a higher or lower DPO better for your business?

Whether a high or low DPO is better for your business depends on your company’s goals, cashflow needs, and supplier relationships.

Generally speaking, a higher DPO can be beneficial for cash flow but runs the risk of damaging supplier relations. In contrast, a lower DPO builds supplier trust and could lead to discounts and other cost savings but can also strain liquidity.

What’s the difference between DPO and DSO?

DPO refers to the time it takes to pay your suppliers, while DSO refers to the time it takes to receive payment from your customers.

Both impact cash flow, with a lower DSO enhancing cash flow by speeding up customer receipts.

What’s a good DPO value?

It’s difficult to define a “good” DPO because much depends on the industry, business model, and supplier relationships. Generally, companies aim for a DPO that allows them to optimize cash flow without harming supplier relationships.

In summary.

Paying attention to DPO is an essential part of managing cash flow. Fortunately, tools exist to give you more control. Automated AP platforms like Airbase allow you to better manage payments. Airbase also gives clear visibility into payment cycles, which can help you delay payments to the optimal point without incurring penalties or damaging relationships. Airbase also reduces the risk of human error and informs better decision-making with real-time data.

Check it out for yourself — book an Airbase demo!