Days Payable Outstanding Definition
Days payable outstanding (DPO), defined also as days purchase outstanding, indicates how many days on average a company pay off its accounts payables during an accounting period. A useful tool to measure and manage DPO is a Flash Report.
Days Payable Outstanding Meaning
Days payable outstanding means the activity ratio that measures how well a business is managing its accounts payable. The lower the ratio, the quicker the business pays its liabilities. It also shows the average payment terms granted to a company by its suppliers. The higher the ratio, the better credit terms a company gets from its suppliers. From a company’s prospective, an increase in DPO is an improvement and a decrease is deterioration.
Days Payable Outstanding Formula
The days payable outstanding formula is listed in two forms below:
DPO = (average accounts payable / cost of goods sold) * 365 days
DPO = average accounts payable / (cost of sales / 365 days)
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Days Payable Outstanding Calculation
Days payable outstanding calculations can occur in the following method:
For example, a business has $ 2,500 in accounts payable, $ 12,500 in cost of goods sold.
Days payable outstanding = (2,500 / 12,500) * 365 = 73 days
Days Payable Outstanding Example
Leslie has a business which provides raw materials, from her distributors, to product manufacturers. Her business, reliant on relationships with customers, offers trade credit on the materials she sells.
Leslie wants to make sure her business is being paid on time with her competitors. This gives her the expectable cash cycles required to maintain a competitive edge. Simply, Leslie wants to know her days payable outstanding. She first asks the question “what is days payable outstanding?”
Leslie contacts her CFO and requests the answer to her question. Recently, she has become aware of the importance of financial ratios in commerce. Though Leslie is not an accountant she wants to make sure that she is in control of the success of her business, and sees an understanding of her financials as one of the many aspects to this.
Leslie’s CFO performs this days payable outstanding analysis:
$2,500 in accounts payable and $12,500 in cost of goods sold.
DPO = (2,500 / 12,500) * 365 = 73 days
Now it is time for Leslie, as the CEO of her company, to step into action. She finds an expert in the industry and discovers that 37 days is a good days payable outstanding benchmark. She is pleased with these results.
Leslie can now move on to other tasks in her company. She is confident that with her analytical mind and the help of her qualified CFO growth can occur. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.
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