Days payable outstanding
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Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers. The formula for DPO is: DPO = \dfrac{Purchase/day} where ending A/P is the accounts payable balance at the end of the accounting period being considered and
Purchase Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between ...
/day is calculated by dividing the total cost of goods sold per year by 365 days.Berman, K., Knight, J., Case, J.: ''Financial Intelligence for Entrepreneurs'', page 151. Harvard Business Press, 2008. DPO provides one measure of how long a business holds onto its cash. DPO can also be used to compare one company's payment policies to another. Having fewer days of payables on the books than your competitors means they are getting better credit terms from their vendors than you are from yours. If a company is selling something to a customer, they can use that customer's DPO to judge when the customer will pay (and thus what payment terms to offer or expect). Having a greater days payables outstanding may indicate the Company's ability to delay payment and conserve cash. This could arise from better terms with vendors. DPO is also a critical part of the "Cash Cycle", which measures DPO and the related Days Sales Outstanding and Days In Inventory. When combined these three measurements tell us how long (in days) between a cash payment to a vendor into a cash receipt from a customer. This is useful because it indicates how much cash a business must have to sustain itself.


See also

* Working capital analysis *
Days Sales Outstanding In accountancy, days sales outstanding (also called DSO and days receivables) is a calculation used by a company to estimate the size of their outstanding accounts receivable. It measures this size not in units of currency, but in average sales da ...
*
Days In Inventory Days in inventory (also known as "Inventory Days of Supply", "Days Inventory Outstanding" or the "Inventory Period") is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The ratio measure ...
* Cash Conversion Cycle


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External links


Basic Instruments of Working Capital Management
Financial ratios Working capital management Accounts payable