Days Payable Outstanding (DPO) Ratio
Understanding the Days Payable Outstanding (DPO) Ratio: Measuring Payment Practices
The Days Payable Outstanding (DPO) ratio is a financial metric that measures the average number of days a company takes to pay its suppliers after receiving inventory or services. It provides insights into a company’s payment practices and liquidity. A higher DPO indicates that a company takes longer to pay its bills, which can be beneficial for cash flow management.
DPO = Average Accounts Payable / Cost of Goods Sold (COGS) ×365
Suppose Company ABC has the following financial details:
Cost of Goods Sold (COGS): $1,200,000
Beginning Accounts Payable: $200,000
Ending Accounts Payable: $300,000
To calculate the Days Payable Outstanding:
Calculate the average accounts payable: (200,000+300,000)/2=250,000
Divide average accounts payable by COGS and multiply by 365: (250,000/1,200,000)×365≈76.04
A DPO of approximately 76 days indicates that Company ABC takes about 76 days on average to pay its suppliers. This suggests the company’s payment cycle and effectiveness in managing its payable obligations.
Efficiency Ratio