DPO Calculator

Days Payable Outstanding (DPO) is the average number of days the company takes to pay outstanding supplier or vendor invoices for previous purchases.

Generally, the DPO metric reflects the bargaining power of the business. More importantly, it shows how the business manages cash flow.

The problem is that calculating your company’s DPO can be a little complicated. However, with the help of our Days Payable Outstanding Calculator, you’ll be able to do it in no time!

What Is DPO?

We use DPO to measure the average number of days before a company pays back its accounts payable. That includes any supplier or vendor invoices.

Therefore, the DPO measures the company’s efficiency in managing its accounts payable.

Generally, a company with a high DPO takes a bit more time to pay its bills to retain its cash for longer durations. In turn, this can allow the company to use the available money in other beneficial ways.On the other hand, having a high DPO isn’t always a good sign. It can reflect the company’s inability to pay its bills on time. Typically, suppliers prefer doing business with a company with a low DPO, as they can get their money in a short period. However, you can always negotiate and make a deal with any supplier.

How to Calculate DPO

To calculate DPO, you need to figure out three values: average accounts payable, purchases, and the days in the accounting period.

First, calculating the average accounts payable is simple. You need to take the average of the beginning and ending accounts payable using this formula: 

average accounts payable = (beginning accounts payable + ending accounts payable) / 2.

Second, you can calculate purchases using the following formula: 

ending inventory – beginning inventory + cost of sold goods.

Finally, the days in the accounting period are usually 365.

DPO Formula

You can calculate the DPO using this formula: 

DPO = (average accounts payable / purchases) x days in the accounting period.

Here’s another version of the formula:

DPO = (accounts payable x number of days in the accounting period) / cost of goods sold.

Btw. Our calculator uses the first formula.

DPO Calculation Example

Let’s assume that a company has average accounts payable of $155,000 and total purchases of $275,000.

DPO = (average accounts payable / purchases) x days in the accounting period = ($155,000 / $275,000) x 365 = 205.73 days.

So, the company takes around 205.73 to pay its bills.

Are you having trouble with the calculations? Calcopolis has many helpful tools you can use!

Applications of DPO

There are many applications for calculating DPO. Let’s check some of them out.

Shows How Efficient a Company Can Manage Its Working Capital

DPO can help determine how efficiently the company can manage its working capital. The period the company takes to pay its bills can say a lot about its financial health and strategies.

Generally, any business can use DPO to assess its liquidity and creditworthiness.

Reflects Financial Flexibility

DPO allows the business to understand its financial flexibility. On top of that, it shows when you can expect your return as a supplier.

Typically, suppliers prefer dealing with a company with a low DPO value. That’s because they don’t have to wait for a long period to get their money.

A low DPO is usually a sign that the company is running its cash flow effectively. Therefore, suppliers feel more encouraged to do business with the company.

Crucial to Calculate the Cash Conversion Cycle (CCC)

Calculating DPO is essential to finding the value of the Cash Conversion Cycle (CCC). The DPO value is an integral part of the CCC formula.

Generally, the CCC is a key metric that reflects the time the business takes to convert the resources inputs into cash.

Typically, DPO focuses on the currently outstanding payables by the business. On the other hand, the CCC follows the cash time cycle from the moment it’s converted into inventory and through to sales and accounts receivable.

Improving the Business DPO Value

There are many ways a company can improve its DPO. For example, the company could start using an electronic payment system. It makes payments quicker and more efficient.

Additionally, to decrease DPO, the company should monitor its accounts payable regularly. That can help identify an issue that could be causing the delay in supplier payments.

Authors

Created by Lucas Krysiak on 2023-04-06 14:46:21 | Last review by Mike Kozminsky on 2023-04-06 15:26:40