Days Payable Outstanding (DPO) Defined

Days payable outstanding (DPO) is a critical financial metric that indicates how long it takes to pay your suppliers. If businesses can clear their books efficiently, they can increase their DPO to benefit from a slightly extended cash flow while minimizing their reputational risk. However, if accounts payable (AP) is unable to keep up, it can jeopardize your relationship with suppliers and signal that your business is struggling.  

In some cases, a DPO that’s too high is the product of inefficiency rather than serious financial challenges. It may be time to bolster your AP department with smart integrations and automation that can power it through a period of growth. Here is a complete explanation of this metric and how you can optimize it to keep your business thriving. 

What “DPO” means (and why it matters)

DPO – also known as accounts payable days – expresses the average number of days it takes to clear your invoices. While DPO sounds similar to days sales outstanding (DSO), these terms describe two completely different concepts. DSO is essentially the opposite of DPO, as it measures the average number of days it takes companies to receive customer payments. 

Along with days inventory outstanding (DIO), DPO and DSO are used in the cash conversion cycle (CCC). That metric expresses the amount of time it takes companies to convert capital into inventory and turn that inventory back into cash. A low CCC is usually ideal since it indicates that a company can quickly turn resources into money. One of the best ways businesses can optimize their CCC is by marginally increasing DPO to make the most of their liquid buying power. Of course, this action needs to be carefully controlled to ensure that suppliers don’t experience an unhealthy increase in DSO.

How to calculate DPO

To calculate your DPO, you’ll first need to take the following steps:

1. Calculate your accounts payable. Your AP is the total amount your company owes to creditors. Some businesses use the AP balance at the end of the accounting period to calculate DPO, while others use the average balance.
2. Find your cost of goods sold. A company can calculate its cost of goods sold (COGS) by combining expenses related to materials, labor and anything else directly related to the creation of its products and services.
3. Determine the length of your accounting period in days. Typically, businesses calculate DPO for a quarter or a full fiscal year. Of course, deciding how to count DPO depends on your unique business ecosystem. 

Once you have this data in place, you’ll be able to determine your days payable outstanding by using this simple formula:

DPO = AP x accounting period / COGS

For example, let’s say a company wants to find its DPO for the past fiscal year. If its AP at the end of this year was $50,000 and its COGS was $700,000, its DPO formula would look like this:

DPO = $50,000 x 365 days / $700,000 = 26.07

As you can see, this company’s average days to pay payables is 26 across the previous year.

Managing and optimizing DPO

Knowing how to calculate your DPO is the first step toward making this financial metric work for you, but the process doesn’t stop there. While it might seem intuitive to pay your bills as quickly as possible, there’s potential value in stretching your DPO to maximize your buying power. However, the farther you extend DPO, the more confident you’ll need to be that you can quickly and accurately clear the books when it’s time. 

Here are a few best practices to help you identify your optimal DPO timeline.

1. Set clear goals

A company can often benefit from increasing its DPO. However, you’ll also need to take factors like early payment incentives and supplier relationships into account before adjusting your payment schedule.

2. Evaluate your AP infrastructure

Extending your DPO can be beneficial, but not if it’s because your AP department is inefficient. Manual processes always take more time and are prone to errors, so you’ll need to be realistic about what your team can achieve. Integrations that automate these processes and streamline your current systems (ERP, CRM, etc.) may be ideal investments – especially if your business is struggling to keep up with rapid growth. 

The following are some of the key areas where the right software integration can make a huge impact on your AP processes.

• Eliminating manual uploading and coding of invoices
• Automated 3-way matching and line-level recognition
• Providing at-a-glance alerts for incorrect or mismatched documents
• Incorporating these activities within your ERP to minimize logins

3. Consider industry data

While looking at your business’s DPO, it’s wise to consider how your payment timeline compares to other companies in your industry. If you’re making payments faster than competing businesses, you may be at a disadvantage when it comes to cash flow.

4. Improve your terms

Once you’re familiar with the average DPO in your line of work, you’ll be in a good position to negotiate more preferable payment terms with suppliers. This is especially true if your business is large or important to its suppliers for other reasons.

How DPO affects cash flow and supplier relationships

In order to understand how DPO can affect your cash flow and relationships with suppliers, you’ll need to learn a bit about high and low DPO. 

A high DPO is normally ideal when it comes to working capital management. When a company takes a relatively long time to pay suppliers back, it can continue to use its cash for that much longer.

Meanwhile, a low DPO can indicate that a company isn’t getting ideal terms from suppliers or fully taking advantage of credit opportunities. 

While this may seem to imply that having a high DPO is better than having a low DPO, the truth is a bit more complicated. In some cases, a high DPO can mean that a company is having trouble meeting financial obligations in a timely manner. Conversely, a business can have a lower-than-average DPO if it pays suppliers early to benefit from early payment discounts. 

What this means for you is there’s no one-size-fits-all approach to DPO optimization. Instead, you’ll need to keep an eye out for early payment discounts and pay attention to your suppliers’ needs to find the right DPO for your business.

Tools and software for DPO management

Along with following the tips listed above, you’ll need access to high-quality accounting software to optimize your business’s days payable outstanding strategy. When your company uses ZoneCapture for this purpose, it will benefit from powerful AP automation features for journal entries and transaction processing. These advantages make it easy to approve payments on whatever schedule makes the most sense for your business. 

For added convenience, ZoneCapture offers a split-screen view displaying original documents alongside transaction records. Additionally, this software can give your business the ability to handle its entire accounts payable process within NetSuite. 

To find out how ZoneCapture, Journal Generator and Zone & Co’s other programs and tools can enhance your company’s payment workflow, set up your demo today.