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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
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Home Supply Chain Finance

What is Days Payable Outstanding?

John Goodden by John Goodden
January 26, 2023
in Supply Chain Finance
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What is Days Payable Outstanding?
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Download file | Play in new window | Duration: 3:57 | Recorded on September 3, 2022

Days Payable Outstanding (DPO) is a financial metric used to calculate, on average, how many days a company is taking to pay its suppliers. DPO is a useful indicator of a company’s health. Accounts payable refers to the amount of money that a company owes to its creditors and suppliers. Days Payable Outstanding is an important metric that often informs decisions regarding accounts payable.

How is Days Payable Outstanding Calculated?

The formula for calculating days payable outstanding is:

DPO = accounts payable x number of days / cost of goods sold

(/ = divided by)

Where accounts payable = the money that is owed to suppliers at the end of a specified period (normally a year or a quarter). Alternatively, it can be the average money owed over that period.

Where number of days = the period of time used in the accounts payable calculation.

Where cost of goods sold = the cost for producing inventory, which includes raw materials and shipping costs.

As an example, a company has an accounts payable valued at £150,000. This is the average over a year period. The cost of goods sold came to £450,000 over that same period of time. Thus:

DPO = 150,000 x 365 / 450,000 =  121.6 Days

How to Interpret DPO

As with Days Inventory Outstanding (DIO) and Days Sales Outstanding (DSO), it is important to consider the DPO in the context of the sector that a company works in. This will give a good indicator to the financial health of a company.

High DPO

A high DPO means that a company is delaying payments successfully allowing more money in working capital. If a company can make inventory and sell it before paying for the materials and shipping it is in a dream situation. That is, as long as the high DPO is not the result of liquidity issues. If a company is delaying payments because it hasn’t got the money to pay its creditors then that is a nightmare scenario.

Low DPO

A low DPO may indicate a number of things. Firstly, it might be that a company is not taking full advantage of its terms of payment agreements with its suppliers. Better terms might be available. It might be that the suppliers are charging extra and are happy to accept slow payment because they are factoring their invoices. And it might be that the company in question is being smart and securing early payment discounts.

From the outside, a company that is quick to pay its suppliers creates good will. A low DPO might indicate a close and mutually beneficial relationship between supplier and customer.

The Sweet Spot

DPO should not be taken in isolation. Supply chains have become long and complex in the global age. Thus, if a company takes a long time to pay its suppliers it will cause the suppliers to have a high Days Sales Outstanding (DSO). A high DSO means a company has money tied up in unpaid bills for too long. This affects working capital in a detrimental way. A winner who takes ages to pay must also create a loser who has to wait ages for payment. Communication between company and supplier is key to finding a good balance.

Cash Conversion Cycle

Another facet of Days Payable Outstanding is that it is used in the calculation for the cash conversion cycle. This metric measures how long it takes for money spent on raw materials to be converted into inventory, and then to be converted back to cash via sales. For more read our post What is the Cash Conversion Cycle?

In Summary

The Days Payable Outstanding is a number indicative of how long a company is taking to pay its suppliers. While a high number is usually preferable, it is not always the case. DPO is also used to calculate a number for the cash conversion cycle.

Tags: cash conversion cycleDays Inventory Outstandingdays payable outstandingdays sales outstanding
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
      • Canada
    • Australasia
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  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
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      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
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