What is Days Payable Outstanding (DPO)?
Days Payable Outstanding (DPO) is a key financial metric used to measure the average time it takes a company to pay its bills.
DPO is an important indicator of a company's financial health and liquidity. It reflects a company's ability to pay its suppliers on time and manage its cash flow.
A high DPO number indicates that a company is taking longer than average to pay its bills, which may signal financial distress. On the other hand, a low DPO suggests that the company is paying its suppliers quickly, which is a sign of good financial health.
How to Calculate Days Payable Outstanding (DPO)?
The calculation for DPO is simple – it’s the number of days a company takes to pay its bills. It’s calculated by dividing the total accounts payable for a given period of time by the total purchases for that same period and then multiplying that number by the number of days in the period.
The formula for calculating DPO is:
DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days
Let’s break down each part of the formula.
Accounts Payable is the total amount of money owed to suppliers and vendors for goods and services purchased on credit. This amount can be found on the balance sheet.
Cost of Goods Sold is the cost to purchase the goods and services that you are selling. This amount can be found on the income statement.
Number of Days is the number of days in the period you are measuring. For example, if you are measuring the number of days it takes to pay a vendor in a month, your number of days would be 30.
To illustrate how to use the formula, let’s say you want to calculate your DPO for the month of April. First, you need to locate the amount of Accounts Payable on your balance sheet. Let’s say the amount is £25,000.
Next, you need to locate the Cost of Goods Sold on your income statement. Let’s say the amount is £50,000. Finally, you need to determine the number of days in the month. In this case, it’s 30 days.
Now that we have all the information we need, we can use the formula to calculate the DPO. DPO = (£25,000 / £50,000) x 30 = 15 Days
This means that in April, it took your business 15 days to pay its creditors.