Days Payable Outstanding

DPO shows how long a company holds on to its cash before paying for goods and services bought on credit. It is usually calculated by dividing accounts payable by cost of goods sold and multiplying by the number of days in the period.

For example, a company with accounts payable of 150,000 and annual cost of goods sold of 1.5 million has a DPO of 36.5 days.

A higher DPO means the company keeps its cash longer, effectively using its suppliers' money to fund operations. This improves its cash conversion cycle. Large companies with strong bargaining power often negotiate longer payment terms.

However, a very high or rising DPO can be a warning sign. It may mean the company is struggling to pay its bills on time, which can damage supplier relationships, lead to less favourable terms or disrupt supplies. Paying too slowly can also harm small suppliers who depend on prompt payment.

DPO should be considered alongside the company's agreed payment terms and industry norms. It is one of the three components of the cash conversion cycle, together with days inventory outstanding and days sales outstanding.