Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The ratio is typically calculated on a quarterly or annual basis, and it indicates how well the company’s cash outflows are being managed.

A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to use those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.

• Days payable outstanding (DPO) computes the average number of days a company needs to pay its bills and obligations.

• Companies that have a high DPO can delay making payments and use the available cash for short-term investments as well as to increase their working capital and free cash flow.

• However, higher values of DPO, though desirable, may not always be a positive for the business as it may signal a cash shortfall and inability to pay.

\begin{aligned} &\text{DPO} = \frac{\text{Accounts Payable}\times\text{Number of Days}}{\text{COGS}}\\ &\textbf{where:}\\ &\text{COGS}=\text{Cost of Goods Sold} \\ &\qquad\ \ \, \,= \text{Beginning Inventory} + \text{P} -\text{Ending Inventory}\\ &\text{P}=\text{Purchases} \end{aligned}​DPO=COGSAccounts Payable×Number of Days​where:COGS=Cost of Goods Sold  =Beginning Inventory+P−Ending InventoryP=Purchases​

To manufacture a salable product, a company needs raw material, utilities, and other resources. In terms of accounting practices, the accounts payable represents how much money the company owes to its supplier(s) for purchases made on credit.

Additionally, there is a cost associated with manufacturing the salable product, and it includes payment for utilities like electricity and employee wages. This is represented by cost of goods sold (COGS), which is defined as the cost of acquiring or manufacturing the products that a company sells during a period. Both of these figures represent cash outflows and are used in calculating DPO over a period of time.

The number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter. The formula takes account of the average per day cost being borne by the company for manufacturing a salable product. The numerator figure represents payments outstanding. The net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills.

Two different versions of the DPO formula are used depending upon the accounting practices. In one of the versions, the accounts payable amount is taken as the figure reported at the end of the accounting period, like “at the end of fiscal year/quarter ending Sept. 30.” This version represents the DPO value as of the mentioned date.

In another version, the average value of beginning AP and ending AP is taken, and the resulting figure represents the DPO value during that particular period. COGS remains the same in both versions.

Generally, a company acquires inventory, utilities, and other necessary services on credit. It results in accounts payable (AP), a key accounting entry that represents a company's obligation to pay off the short-term liabilities to its creditors or suppliers. Beyond the actual dollar amount to be paid, the timing of the payments*—from the date of receiving the bill till the cash actually going out of the company’s account—*also becomes an important aspect of the business. DPO attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time.

Companies having high DPO can use the available cash for short-term investments and to increase their working capital and free cash flow (FCF). However, higher values of DPO may not always be a positive for the business. If the company takes too long to pay its creditors, it risks jeopardizing its relations with the suppliers and creditors who may refuse to offer the trade credit in the future or may offer it on terms that may be less favorable to the company. The company may also be losing out on any discounts on timely payments, if available, and it may be paying more than necessary.

Additionally, a company may need to balance its outflow tenure with that of the inflow. Imagine if a company allows a 90-day period for its customers to pay for the goods they purchase but has only a 30-day window to pay its suppliers and vendors. This mismatch will result in the company being prone to cash crunch frequently. Companies must strike a delicate balance with DPO.

A high DPO can indicate a company that is using capital resourcefully but it can also show that the company is struggling to pay its creditors.

Typical DPO values vary widely across different industry sectors and it is not worthwhile comparing these values across different sector companies. A firm's management will instead compare its DPO to the average within its industry to see if it is paying its vendors too quickly or too slowly. Depending upon the various global and local factors, like the overall performance of the economy, region, and sector, plus any applicable seasonal impacts, the DPO value of a particular company can vary significantly from year to year, company to company, and industry to industry.

DPO value also forms an integral part of the formula used for calculating the cash conversion cycle (CCC), another key metric that expresses the length of time that a company takes to convert the resource inputs into realized cash flows from sales. While DPO focuses on the current outstanding payable by the business, the superset CCC follows the entire cash time-cycle as the cash is first converted into inventory, expenses, and accounts payable, through to sales and accounts receivable, and then back into cash in hand when received.

As a historical example, the leading retail corporation Walmart (WMT) had accounts payable worth $49.1 billion and cost of sales (cost of goods sold) worth $420.3 billion for the fiscal year ending Jan. 31, 2021.1 These figures are available in the annual financial statement and balance sheet of the company. Taking the number of days as 365 for annual calculation, the DPO for Walmart comes to [ (49.1 x 365) / 420.1 ] = 42.7 days.

Similar calculations can be used for technology leader Microsoft (MSFT), which had $2.8 billion as AP and $41.3 billion as COGS, leading to a DPO value of 24.7 days.2

It indicates that during the fiscal year ending in 2021, Walmart paid its invoices around 43 days after receiving the bills, while Microsoft took around 25 days, on average, to pay its bills.

A look at similar figures for the online retail giant Amazon (AMZN), which had an AP of $72.5 billion and COGS of $233.3 billion for the fiscal year 2020, reveals a very high value of 113.4 days. Such high value of DPO is attributed to the working model of Amazon, which roughly has 50% of its sales being supplied by third-party sellers.3 Amazon instantly receives funds in its account for the sale of goods that are actually supplied by third-party sellers using Amazon’s online platform.

However, it doesn’t pay the sellers immediately after the sale but may send accumulated payments based on a weekly/monthly or threshold-based payment cycle. This working mechanism allows Amazon to hold onto the cash for a longer period of time, and the leading online retailer ends up with a significantly higher DPO.

Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The ratio is typically calculated on a quarterly or annual basis, and it indicates how well the company’s cash outflows are being managed.

A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to use those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.

• Days payable outstanding (DPO) computes the average number of days a company needs to pay its bills and obligations.

• Companies that have a high DPO can delay making payments and use the available cash for short-term investments as well as to increase their working capital and free cash flow.

• However, higher values of DPO, though desirable, may not always be a positive for the business as it may signal a cash shortfall and inability to pay.

\begin{aligned} &\text{DPO} = \frac{\text{Accounts Payable}\times\text{Number of Days}}{\text{COGS}}\\ &\textbf{where:}\\ &\text{COGS}=\text{Cost of Goods Sold} \\ &\qquad\ \ \, \,= \text{Beginning Inventory} + \text{P} -\text{Ending Inventory}\\ &\text{P}=\text{Purchases} \end{aligned}​DPO=COGSAccounts Payable×Number of Days​where:COGS=Cost of Goods Sold  =Beginning Inventory+P−Ending InventoryP=Purchases​

To manufacture a salable product, a company needs raw material, utilities, and other resources. In terms of accounting practices, the accounts payable represents how much money the company owes to its supplier(s) for purchases made on credit.

Additionally, there is a cost associated with manufacturing the salable product, and it includes payment for utilities like electricity and employee wages. This is represented by cost of goods sold (COGS), which is defined as the cost of acquiring or manufacturing the products that a company sells during a period. Both of these figures represent cash outflows and are used in calculating DPO over a period of time.

The number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter. The formula takes account of the average per day cost being borne by the company for manufacturing a salable product. The numerator figure represents payments outstanding. The net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills.

Two different versions of the DPO formula are used depending upon the accounting practices. In one of the versions, the accounts payable amount is taken as the figure reported at the end of the accounting period, like “at the end of fiscal year/quarter ending Sept. 30.” This version represents the DPO value as of the mentioned date.

In another version, the average value of beginning AP and ending AP is taken, and the resulting figure represents the DPO value during that particular period. COGS remains the same in both versions.

Generally, a company acquires inventory, utilities, and other necessary services on credit. It results in accounts payable (AP), a key accounting entry that represents a company's obligation to pay off the short-term liabilities to its creditors or suppliers. Beyond the actual dollar amount to be paid, the timing of the payments*—from the date of receiving the bill till the cash actually going out of the company’s account—*also becomes an important aspect of the business. DPO attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time.

Companies having high DPO can use the available cash for short-term investments and to increase their working capital and free cash flow (FCF). However, higher values of DPO may not always be a positive for the business. If the company takes too long to pay its creditors, it risks jeopardizing its relations with the suppliers and creditors who may refuse to offer the trade credit in the future or may offer it on terms that may be less favorable to the company. The company may also be losing out on any discounts on timely payments, if available, and it may be paying more than necessary.

Additionally, a company may need to balance its outflow tenure with that of the inflow. Imagine if a company allows a 90-day period for its customers to pay for the goods they purchase but has only a 30-day window to pay its suppliers and vendors. This mismatch will result in the company being prone to cash crunch frequently. Companies must strike a delicate balance with DPO.

A high DPO can indicate a company that is using capital resourcefully but it can also show that the company is struggling to pay its creditors.

Typical DPO values vary widely across different industry sectors and it is not worthwhile comparing these values across different sector companies. A firm's management will instead compare its DPO to the average within its industry to see if it is paying its vendors too quickly or too slowly. Depending upon the various global and local factors, like the overall performance of the economy, region, and sector, plus any applicable seasonal impacts, the DPO value of a particular company can vary significantly from year to year, company to company, and industry to industry.

DPO value also forms an integral part of the formula used for calculating the cash conversion cycle (CCC), another key metric that expresses the length of time that a company takes to convert the resource inputs into realized cash flows from sales. While DPO focuses on the current outstanding payable by the business, the superset CCC follows the entire cash time-cycle as the cash is first converted into inventory, expenses, and accounts payable, through to sales and accounts receivable, and then back into cash in hand when received.

As a historical example, the leading retail corporation Walmart (WMT) had accounts payable worth $49.1 billion and cost of sales (cost of goods sold) worth $420.3 billion for the fiscal year ending Jan. 31, 2021.1 These figures are available in the annual financial statement and balance sheet of the company. Taking the number of days as 365 for annual calculation, the DPO for Walmart comes to [ (49.1 x 365) / 420.1 ] = 42.7 days.

Similar calculations can be used for technology leader Microsoft (MSFT), which had $2.8 billion as AP and $41.3 billion as COGS, leading to a DPO value of 24.7 days.2

It indicates that during the fiscal year ending in 2021, Walmart paid its invoices around 43 days after receiving the bills, while Microsoft took around 25 days, on average, to pay its bills.

A look at similar figures for the online retail giant Amazon (AMZN), which had an AP of $72.5 billion and COGS of $233.3 billion for the fiscal year 2020, reveals a very high value of 113.4 days. Such high value of DPO is attributed to the working model of Amazon, which roughly has 50% of its sales being supplied by third-party sellers.3 Amazon instantly receives funds in its account for the sale of goods that are actually supplied by third-party sellers using Amazon’s online platform.

However, it doesn’t pay the sellers immediately after the sale but may send accumulated payments based on a weekly/monthly or threshold-based payment cycle. This working mechanism allows Amazon to hold onto the cash for a longer period of time, and the leading online retailer ends up with a significantly higher DPO.