What is ‘Days Payable Outstanding – DPO’
The number of days payable outstanding (DPO) represents the typical payment term for a corporation. Generally speaking, days payable outstanding indicates how long it takes a corporation to settle its invoices to trade creditors, such as vendors. It is customary to review DPO on a quarterly or annually basis.
Explaining ‘Days Payable Outstanding – DPO’
Companies must maintain a fine balance while dealing with DPO. Working capital and free cash flow benefit from the firm delaying payment of its creditors since the longer it takes to pay its creditors, the more money it has on hand. However, if the corporation takes an excessive amount of time to pay its debtors, the creditors will be dissatisfied. They may refuse to grant credit in the future, or they may offer less favorable conditions in the future as an alternative.
In addition, because some creditors offer discounts to enterprises who make on-time payments, the company may be paying more for its supplies than it should be paying. The cost of increasing DPO may be less expensive than the cost of skipping that cash sooner and having to borrow the money to cover the deficit, especially if cash is limited.
‘Days Payable Outstanding – DPO’ FAQ
Is higher or lower days payable outstanding better?
A high days payable outstanding ratio indicates that a corporation is taking an excessive amount of time to pay its invoices and debtors. DPOs are generally considered to be positive since they indicate that a firm has excess cash on hand that may be utilized for short-term expenditures, such as acquisitions.
What causes DPO to increase?
If a payment is delayed, the corporation will hold onto the money for a longer period of time. Increased DPOs result in increased short-term liquidity (i.e., cash on hand). As a result, organizations aim to grow their DPO in order to benefit from the fact that increasing an operational current obligation such as accounts payable results in a cash inflow.
How do you calculate days payable outstanding?
Using the following formula, one may determine days payable outstanding (DPO): DPO = Accounts Payable X Number of Days / Cost of Goods Sold (COGS). COGS in this context refers to the sum of initial inventory plus purchases minus the sum of ending inventory.
Further Reading
- Receivables management: The importance of financial indicators in assessing the creditworthiness – yadda.icm.edu.pl [PDF]
- Accrual Duration and Financial Statement Errors – papers.ssrn.com [PDF]
- Effects of working capital management on firms’ profitability: evidence from cheese‐producing companies – onlinelibrary.wiley.com [PDF]
- Impact of working capital management on business profitability: Evidence from the Polish dairy industry – www.agriculturejournals.cz [PDF]
- Design of an efficient strategy for optimization of payment induced by a rational supply chain process: a prerequisite for maintaining a satisfactory level of working – www.sciencedirect.com [PDF]
- Trade credit in the UK economy (1998–2012): An exploratory analysis of company accounts – papers.ssrn.com [PDF]
- Evidence for using the cash conversion cycle to test the relationship with the corporate profitability: an empirical analysis on a sample of textile Italian SMEs – www.inderscienceonline.com [PDF]
- Working capital management: Financial and valuation impacts – www.sciencedirect.com [PDF]
