Days payable outstanding (DPO): definition, formula and calculation, plus examples

Days payable outstanding, meaning the working capital metric, tracks how quickly your company pays suppliers. By monitoring DPO, you control cash flow, protect short-term liquidity, and strengthen your supplier relationships while streamlining working capital.

DPO = (Average Accounts Payable ÷ Cost of Goods Sold) X (Number of Days)

The DPO calculation is straightforward and gives you a clear view of how efficiently you manage supplier payments. To use the DPO formula, you should start by gathering the right financial data from your balance sheet and income statement:

• Average accounts payable: Add the beginning and ending balances for the period and divide by two to see how much you typically owe suppliers.
• Cost of goods sold (COGS): Include only the direct costs of producing goods, excluding indirect expenses like marketing.
• Number of days: Define the period you’re measuring, usually a year (365 days) or a quarter (90 days).

For example, if your average accounts payable is £100,000 and COGS is £1,200,000:

DPO = 100,000 ÷ 1,200,000 X 365 = 30.42 days

The days payable formula example used here shows your company takes about 30 days to pay suppliers. You should try to keep your records accurate and up to date to ensure you make decisions based on the right numbers. And don’t forget that financial software can help you track DPO more easily and reliably.

Here’s an example of days payable outstanding in action, showing how DPO gives actionable insights into balancing cash flow, supplier relations, and working capital management.

Star Fresh Ltd is a mid-sized food distributor. Over the past year, the company’s average accounts payable (what it owes its suppliers) was £120,000. The cost of goods sold (COGS) for the year was £1,200,000. Using the DPO formula:

DPO = Average Accounts Payable ÷ COGS X 365

DPO = 120,000 ÷ 1,200,000 X 365 ≈ 36.5 days

So, Star Fresh Ltd takes around 36 days on average to pay its suppliers. This means:

• The company is taking a moderate amount of time to pay, helping manage cash flow.
• If Star Fresh delayed payments further, it could increase liquidity but risk annoying key suppliers.
• If it paid faster, it could strengthen supplier relationships but tie up cash that could be used elsewhere.

DPO works differently from other financial metrics like days sales outstanding (DSO) and inventory turnover:

• Days sales outstanding tracks how quickly you collect payments from customers.
• Inventory turnover shows how often you sell and replace stock.

DPO, on the other hand, focuses on how long you take to pay your suppliers. By keeping an eye on all three, you get a clear picture of your cash flow and can make better decisions to keep your operations running smoothly.

High DPO

A higher DPO means your company takes longer to pay suppliers. This can free up cash for short-term investments, boost your working capital, and increase your free cash flow, which gives you more flexibility to grow your business.

But there’s a catch: stretching payments too long can strain supplier relationships, risk losing favourable trade credit, and even cause you to miss out on early payment discounts.

Low DPO

A lower DPO means you pay suppliers faster, which strengthens your relationships and demonstrates the financial health of your business by showing you can meet your obligations on time. So, paying quickly can also boost your reputation and keep suppliers happy.

However, if you pay too soon, it can tie up cash that could be used elsewhere or earn interest if held longer.

A “good” DPO is all about balance. In general, companies aim to increase their DPO over time because taking longer to pay suppliers frees up cash, boosts liquidity, and increases your free cash flow (FCF).

That said, it’s not as simple as paying everyone late. How much you can extend payment really depends on your bargaining power with suppliers. Companies with high order volumes, repeat business, or long-term relationships can often negotiate longer payment terms. But, smaller or less critical customers may not have that flexibility, and suppliers could insist on upfront payment or stricter terms.

So, a strong DPO is one that maximises your cash flow while keeping supplier relationships healthy, finding that sweet spot between financial efficiency and business strategy.

“Managing DPO strategically gives you the flexibility to reinvest in your business and strengthen your working capital,” says Steve Scott, CFAO at Allianz Trade UK.

But, at the same time, you want to keep suppliers happy and maintain strong relationships. It’s a balancing act!

Here are our practical steps for taking control of your DPO:

1. Negotiate payment terms with suppliers
   The first step would be to talk to your suppliers about extending payment deadlines where possible. If your goal is to maximise your DPO, you might choose to skip early payment discounts and keep cash on hand longer.
2. Streamline your payments with technology
   Electronic payment systems can really help when it comes to making payments on time and cuts out the checks and manual processing. With instant payments, you will almost always avoid late fees and keep a good relationship with your suppliers.
3. Monitor your accounts payable regularly
   Keep a close eye on outstanding invoices, as regular reviews help you identify delays or issues before they become bigger problems.
4. Keep your record accurate and up-to-date
   If you keep accurate records, you will always know exactly what you owe and when. This will help decrease errors and disputes and improve problem resolution with suppliers.
5. Track DPO trends over time
   Your DPO is most valuable when you monitor it over time. So, be sure to track changes to see if your strategy is improving cash flow or if you need to make adjustments to maintain the right balance.

Days payable outstanding (DPO) is a key lever for operational efficiency, strong supplier relationships, and smart cash flow management. But it also influences your Cash Conversion Cycle (CCC), working capital, and negotiating power.

Here’s how DPO impacts your business across five crucial areas:

• Operational efficiency: A higher DPO lets you hold onto cash longer, which frees up funds for daily operations or strategic investments. But, as mentioned, too high a DPO could indicate liquidity pressure or strong negotiating leverage, depending on context. Manage the trade-off effectively and your cash will flow smoothly.
• Vendor and supplier relationships: If you pay your suppliers on time, you build trust and can earn better credit terms or discounts. Stretch your payments too far and you risk straining relationships and losing favourable terms. If you make payments on time, you maintain your reliability and keep your partnerships strong.
• Cash Conversion Cycle (CCC): DPO directly affects how quickly your business converts investments into cash. Increasing DPO can help reduce your CCC, as you hold onto cash for longer before paying suppliers.
• Working Capital Management: DPO influences liquidity and working capital. A higher DPO gives you more cash to run daily operations and fund short-term investments, while a lower DPO improves supplier relationships but can strain cash reserves. So, optimising DPO is key to keeping your working capital healthy.
• Negotiation power: A well-managed DPO can boost your bargaining leverage with suppliers. With more cash on hand, you can negotiate extended payment terms or secure early-payment discounts. Manage your DPO well and you will improve supplier relationships and perhaps reduce costs, which boosts overall profitability.

Finally: “Benchmarking your DPO against industry standards highlights opportunities to improve efficiency and competitiveness,” according to Steve Scott.

Clearly, days payable outstanding has its pros and cons. Our table below breaks down the key benefits and disadvantages of DPO, making it easier to see how it impacts your business at a glance.

Many companies like yours rely on trade credit insurance as a safety net to improve their days payable outstanding. It’s an effective way to protect your business from the risks of customer non-payments.

With Allianz Trade UK, you can extend favourable credit terms to suppliers and customers alike with confidence. Our insurance reduces the risks of outstanding invoices, providing you with the flexibility to negotiate better payment terms and better manage your cash flow. By protecting your receivables, you can plan payments more effectively, make those supplier relationships more robust, and potentially extend your DPO without risking your financial stability.

Take control of your cash flow today. Contact us and discover how trade credit insurance can help your business.