Days Payable Outstanding (DPO): Definition, Benefits, and How to Calculate It

Managing cash flow can be tricky, especially when juggling payments to suppliers and maintaining good relationships. Days Payable Outstanding (DPO) is one of the key metrics to monitor, but finding the right balance isn’t always easy.

When payments are made too early, businesses risk losing valuable working capital that could have been reinvested elsewhere. On the other hand, delaying payments too long can harm supplier trust, which leads to stricter terms or termination of contract.

Then how does one balance the delicate handling of DPO? This article discusses the answers, including the definition of days payable outstanding, the advantages and disadvantages, as well as how to calculate it. Read more to find out!

What is Days Payable Outstanding?

Days Payable Outstanding (DPO) is a financial ratio that measures the average days to settle bills and invoices with trade creditors, such as suppliers, vendors, or financiers. Typically calculated quarterly or annually, it provides insights into how efficiently a company manages its cash outflows.

DPO is often viewed as a reflection of a buyer’s bargaining power as a part of the accounting system, showing how effectively a company negotiates favorable terms with its suppliers or vendors, such as price discounts or extended payment deadlines.

A higher DPO indicates that the company takes more time to pay its obligations, allowing it to hold onto cash for a longer period. This delay can be advantageous, as it gives the company an opportunity to utilize the available funds for other purposes to maximize value.

However, an excessively high DPO may signal potential issues with liquidity or the inability to meet financial commitments on time.

What is Considered as Good Days Payable Outstanding?

The ideal DPO varies by industry, but balancing cash flow and supplier relationships is key. Kailangang i-evaluate ng mga companies ang kanilang DPO trends para masigurado ang financial stability nang hindi naapektuhan ang kanilang operations o partnerships

To understand more, here’s the explanation for high DPO, low DPO, and what they mean to companies based on their goals and foundations:

High DPO

A high DPO is typically beneficial as it allows a company to hold onto cash longer, potentially using it for short-term investments. However, delaying payments excessively could upset creditors, leading to stricter terms or refusal to extend credit. Additionally, an unusually high DPO might signal that the company is facing difficulties in securing cash to pay its creditors.

A higher days payable outstanding than the industry average may indicate:

• More favorable credit terms compared to competitors; or
• Financial struggles causing delayed payments to creditors.

Low DPO

A low DPO might suggest that the company is not taking full advantage of the credit terms offered by suppliers. Alternatively, it could indicate that the company has only short-term credit arrangements with its creditors.

A lower DPO than the industry average may suggest:

• Less favorable credit terms than competitors; or
• Underutilization of available credit periods.

The Difference among DPO, DSO, and DIO

Each metric provides unique insights into how a company handles its payables, receivables, and inventory. Together, they reveal a complete picture of cash flow and operational health. So, what’s the difference among the three metrics? Below are the differences explained:

• Days Payable Outstanding (DPO) shows how many days a company takes to pay its suppliers after receiving goods or services. A higher DPO means the company keeps its cash longer. However, taking too long to pay can hurt supplier relationships and lead to less favorable terms in the future.
• Days Sales Outstanding (DSO), on the other hand, measures how quickly a company collects payments from its customers. A lower DSO means the company collects payments efficiently. A higher DSO suggests customers are taking longer to pay, which could point to problems with credit or billing processes.
• Days Inventory Outstanding (DIO) tracks how long a company holds inventory before selling it. A low DIO shows inventory is selling quickly, but if it’s too low, the company risks running out of stock and losing sales.

Therefore, we can conclude that:

• DPO focuses on how fast the company pays suppliers.
• DSO shows how quickly it collects from customers.
• DIO tracks how long inventory stays before being sold.

Advantages of Days Payable Outstanding

Days Payable Outstanding offers insights into a company’s payment behavior and its financial health. Here are the advantages that make DPO an essential metric for operational and financial success:

• Evaluates Financial Flexibility: Helps a company understand its ability to manage cash flow and leverage credit terms effectively.
• Assesses Creditworthiness and Liquidity: Provides insights into the company’s financial health and ability to meet short-term obligations.
• Identifies Payment Patterns: Allows the company to determine whether it is paying bills promptly or strategically delaying payments.
• Supports Supplier Relationship Management: Balancing DPO helps maintain good relationships with suppliers, which can be crucial for securing favorable terms or early deliveries.
• Optimizes Cash Flow Management: Helps evaluate the trade-off between paying suppliers early to maintain goodwill and retaining cash for other business needs.
• Enhances Purchasing Power: Enables better decision-making by balancing the benefits of early payment against the opportunity cost of spending capital too soon.

Disadvantages of Days Payable Outstanding

While there are various advantages of Days Payable Outstanding, it also comes with certain drawbacks. Here are the disadvantages that businesses need to consider when evaluating their DPO:

• Lack of a Standard Benchmark: DPO varies significantly by industry, company size, and bargaining power, so it’s difficult to determine what constitutes a “healthy” DPO.
• Dependency on Context: The DPO figure alone is insufficient to provide meaningful insights. It requires further investigation to understand the underlying reasons and drivers.
• Risk of Misinterpretation: A high DPO might be mistaken for efficient cash management, but it could actually indicate late payments, potential late fees, or strained supplier relationships.
• Variability Due to Negotiation Power: Larger companies with strong bargaining power may achieve better terms, influencing their DPO and making comparisons with smaller companies less meaningful.
• Potential Supplier Issues: Delaying payments excessively to increase DPO can harm supplier relationships, which might lead to stricter terms or reduced reliability in the supply chain.
• Hidden Financial Risks: Without understanding the drivers of DPO, a company may overlook critical issues, such as liquidity problems or inefficiencies in accounts payable processes.

By relying solely on DPO without contextual analysis, companies risk making misguided decisions about their financial and operational strategies. The companies might also struggle with more accounting problems as time goes by, if DPO isn’t utilized properly.

Days Payable Outstanding Formula

The formula for calculating Days Payable Outstanding (DPO) is as follows:

DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × Number of Days in the Accounting Period

Alternatively:

DPO = Average Accounts Payable ÷ (Cost of Sales ÷ Number of Days in the Accounting Period)

Where:

• Cost of Sales is calculated as:
  Beginning Inventory + Purchases – Ending Inventory

How to Calculate Days Payable Outstanding

Determining a company’s Days Payable Outstanding (DPO) involves a three-step process:

1. Step 1: Determine the company’s average (or ending) accounts payable balance.
2. Step 2: Divide the average (or ending) accounts payable by the cost of goods sold (COGS).
3. Step 3: Multiply the result by 365 days.

The Days Payable Outstanding (DPO) is a key working capital metric that measures the average number of days a company takes to pay its suppliers or vendors for credit purchases, rather than paying in cash.

On the balance sheet, the accounts payable (AP) item reflects the total amount owed to suppliers for past credit purchases that remain unpaid.

When goods or services are delivered and an invoice is received, the company owes payment but has not yet settled the amount. During this period, the company retains the cash and can use it without restrictions.

Delaying payments allows the company to hold onto cash for a longer time, which can improve profit margins and boost free cash flow (FCF). As a result, a higher DPO indicates better short-term liquidity, meaning the company has more cash available for immediate needs.

Since an increase in accounts payable counts as a cash inflow, many companies aim to increase their DPO. While payments must eventually be made, the delay enables the company to use that cash for other purposes in the meantime.

Example of Days Payable Outstanding

Understanding days payable outstanding becomes clearer with practical examples that illustrate how it’s calculated. Below is an example to demonstrate the steps involved in calculating DPO.

1. Income Statement Assumptions

Suppose Luzon Manufacturing Corporation has an accounts payable balance of ₱1.5 billion in 2024 and a cost of goods sold (COGS) of ₱5 billion in the same year.

• Accounts Payable (A/P): ₱1.5 billion
• Cost of Goods Sold (COGS): ₱5 billion

Additionally, the company’s COGS is expected to grow 10% year-over-year (YoY) through the entire projection period.

• COGS Growth Rate: 10% YoY

2. Days Payable Outstanding Calculation Example (DPO)

To forecast accounts payable, we first calculate the historical DPO for 2024.

The formula is:
DPO = (Accounts Payable ÷ COGS) × Number of Days in the Period

For 2024, this becomes:
DPO, 2024A = (₱1.5 billion ÷ ₱5 billion) × 365 = 110 Days

For simplicity, we assume the DPO remains constant at 110 days throughout the forecast period (“straight-line”).

In practice, DPO may gradually increase as Luzon Manufacturing Corporation gains credibility, expands its operations, and builds stronger relationships with suppliers.

3. Accounts Payable Projection Example (DPO Ratio)

Using the 110 DPO assumption, the formula to project accounts payable is:
A/P = (DPO ÷ 365 Days) × COGS

For 2025:
A/P, 2025E = (110 ÷ 365) × ₱5.5 billion = ₱1.65 billion

Following this approach, the projected accounts payable for the forecast period is:

• 2025E: ₱1.65 billion
• 2026E: ₱1.815 billion
• 2027E: ₱1.997 billion
• 2028E: ₱2.197 billion
• 2029E: ₱2.416 billion

4. Payables Forecast Example (Percentage of Revenue Method)

Alternatively, accounts payable can be forecasted as a percentage of revenue.

Assume Luzon Manufacturing Corporation had revenues of ₱15 billion in 2024, with revenues expected to grow at 10% annually, consistent with the COGS growth assumption.

To calculate the percentage of revenue:
A/P % Revenue = A/P ÷ Revenue
A/P % Revenue, 2024 = ₱1.5 billion ÷ ₱15 billion = 10%

Using this 10% assumption:

• 2025E Revenue: ₱16.5 billion → A/P = 10% × ₱16.5 billion = ₱1.65 billion
• 2026E Revenue: ₱18.15 billion → A/P = 10% × ₱18.15 billion = ₱1.815 billion
• 2027E Revenue: ₱19.97 billion → A/P = 10% × ₱19.97 billion = ₱1.997 billion
• 2028E Revenue: ₱21.97 billion → A/P = 10% × ₱21.97 billion = ₱2.197 billion
• 2029E Revenue: ₱24.16 billion → A/P = 10% × ₱24.16 billion = ₱2.416 billion

Both the DPO method and the percentage of revenue method yield equivalent results in this case because COGS and revenue are growing at the same rate.

The DPO method is often considered more credible, as it directly ties accounts payable to operational cash flow and supplier payment practices. However, keeping track of these metrics might be burdensome, especially for companies with growing revenue and logistics.

Thus, many companies have started to increasingly implement digital accounting tools to help them iron out their finances. This article discusses about best accounting software Philippines to help businesses find out the most suitable solution for them.

How to Improve Days Payable Outstanding

Now you already understand the basics of the days payable outstanding. However, have you known the best ways to improve its management? Here are five ways to improve DPO:

1. Implement Electronic Payment Systems

First, switch to electronic payment systems by integrating tools like online banking or ERP software. Set up automated payment schedules to ensure payments are processed on specific due dates.

Additionally, replace checks with electronic fund transfers (EFT) or direct deposits to eliminate delays caused by mailing or manual processing.

2. Regularly Monitor Accounts Payable

Next, create a system for routine monitoring by using accounting software to track due dates, outstanding invoices, and payment statuses.

Assign a dedicated team or personnel to review accounts payable reports weekly, flag overdue payments, and follow up with internal teams or suppliers to resolve bottlenecks.

To monitor accounts payable (and accounts receivable) easily, you can use automated accounting platform, such as HashMicro Accounting Software. No need to sit for hours to track every small change and update it, let the software do that for you! Click on the banner below to try it out for free:

3. Maintain Accurate and Up-to-Date Records

Finally, organize your accounts payable data by implementing a centralized digital system where all invoices, purchase orders, and payment records are stored. Then, use tools to automate data entry and reconciliation to reduce errors.

You should also conduct monthly audits to ensure records are updated and accurately reflect the current status of all payables.

Optimize Your DPO Management with HashMicro Accounting Software

Managing cash flow can feel like a tightrope walk; bayaran mo ng masyadong maaga, and you lose valuable working capital. Pero kung masyadong delayed, you risk strained relationships or penalties.

Kung maayos ang hawak mo sa days payable outstanding, you can reinvest in projects, expand operations, or even fund marketing efforts without relying on additional loans.

With HashMicro Accounting Software, you can effortlessly track and manage Days Payable Outstanding (DPO) through automated tools and real-time analytics. The system integrates seamlessly with your accounts payable processes with these features:

• Bank Integration – Auto Reconciliation: Automatically fetches transaction data from your bank accounts and compares it with your internal records, and identifies discrepancies in real-time (e.g., missing entries, mismatched amounts).
• Bank Integration – Auto Payment: Allows users to set up payment schedules for invoices directly within the system. Sends payments electronically to suppliers on the due date, as approved by the user.
• Cash Flow Reports: Automatically compiles data on cash inflows and outflows, categorized by source (e.g., sales, expenses, loans). Displays detailed cash flow statements in real-time, broken down by day, week, or month.
• Financial Statement with Budget Comparison: Pulls data from financial statements and compares actual values (e.g., revenue, expenses) to predefined budgets, and highlights variances in amounts and percentages.
• Profit & Loss vs Budget & Forecast: Compares the profit and loss statement to both the original budget and updated forecasts, and provides trend analysis to anticipate future financial outcomes.

Furthermore, this software can be integrated with your supply chain systems, including inventory, vendor management systems, and warehouse, so that it covers the end-to-end processes seamlessly.

Conclusion 

Days Payable Outstanding (DPO) is a crucial metric that measures how efficiently companies manage their payment obligations. However, it’s essential to maintain the right DPO level to avoid cash flow issues or strained partnerships, as it requires careful balance.

With HashMicro Accounting Software, managing DPO becomes simple, efficient, and worry-free through its automated tools and real-time analytics. The system simplifies payment schedules, ensures accurate reconciliations, and nagbibigay ng comprehensive cash flow insights na madali mong maiintindihan at magagamit sa planning.

Say goodbye to manual processes and cash flow uncertainty with HashMicro, designed to handle accounts payable seamlessly. Hawakan ang DPO mo nang maayos, improve financial clarity, and reinvest your cash where it matters most.

Start your journey toward smarter financial management, schedule a free demo today and experience the difference!

FAQ on Days Payable Outstanding

• How does DPO impact a company’s cash conversion cycle?

  DPO is a component of the cash conversion cycle (CCC), representing the time a company takes to pay its suppliers. An extended DPO can lengthen the CCC, indicating efficient use of credit terms, while a shorter DPO may suggest quicker payments, affecting overall liquidity.

• What are the potential risks of maintaining a high DPO?

  While a high DPO can improve short-term cash flow by delaying payments, it may strain supplier relationships, lead to less favorable credit terms, or result in missed early payment discounts. It’s essential to balance DPO to avoid these pitfalls.

• Can a company’s DPO affect its credit rating?

  Yes, consistently high DPOs might raise concerns about a company’s liquidity and creditworthiness among creditors and investors, potentially impacting its credit rating. Conversely, a very low DPO could indicate underutilization of available credit.

• How does industry type influence average DPO values?

  Average DPO varies significantly across industries due to differing operational practices and credit terms. For instance, manufacturing firms might have longer DPOs compared to service-based companies. Comparing DPOs is most meaningful within the same industry.