Days Payable Outstanding (DPO)
Definition
Days Payable Outstanding (DPO) is a financial ratio that measures the average number of days a company takes to pay its suppliers and vendors after receiving an invoice.
Explanation
DPO is a key working capital metric that indicates how efficiently a company manages its cash flow. A higher DPO means the company holds onto cash longer, improving liquidity. However, excessively high DPO can strain supplier relationships and signal financial distress.
DPO is calculated by dividing average accounts payable by the cost of goods sold per day. The optimal DPO varies by industry, with companies typically aiming for a balance between cash conservation and maintaining good supplier relationships.
Example
A company with average accounts payable of $100,000 and daily COGS of $5,000 has a DPO of 20 days, meaning it takes an average of 20 days to pay its suppliers.