Days payable outstanding

What it means

Days payable outstanding, or DPO, shows how many days on average it takes a company to pay its suppliers. It is the average balance of trade payables divided by purchases or costs and multiplied by the number of days in the period.

It mirrors days sales outstanding. The gap between the two, together with inventory days, forms the cash conversion cycle, meaning the number of days the company has to finance its operations from its own or borrowed money.

A longer DPO means suppliers are partly financing the company, which reduces the need for working capital. A shorter one may mean the company pays early for no reason, or that suppliers do not trust it and ask for payment up front.

How it works in practice

In financial analysis we compare it with the agreed payment terms. If contracts say 30 days and the company pays in 75, that is not clever financing but a sign of liquidity trouble, which suppliers and banks see too.

DPO can be extended legitimately by negotiating longer terms, through reverse factoring or with framework agreements. Conversely, when cash is plentiful it pays to settle early and take an early payment discount if the discount exceeds what the money earns in the bank.

We take the data from the subledger, not just from the balance sheet at year end. The payables balance at 31 December is often skewed by one-off payments, so for monthly reporting we calculate the ratio from averages.

What to watch out for

Paying suppliers late is cheap credit only at first sight. The supplier can claim late payment interest and fixed recovery compensation, worsen its prices, stop deliveries or hand the debt to collection, and the company may end up in debtor registers.

Overdue payables are also a legal sign of inability to pay. If a company cannot meet at least two money obligations to more than one creditor within 30 days after they fall due, it may be insolvent and the director must act. A long DPO is therefore a legal problem as well as a financial one.