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'''Days payable outstanding''' ('''DPO''') is an efficiency ratio that measures the average number of days a company takes to pay its suppliers. | |||
The formula for DPO is: | |||
<math>DPO = \dfrac{ending~A/P}{COGS/day}</math> | |||
where ending A/P is the accounts payable balance at the end of the accounting period being considered and [[Cost of goods sold|COGS]]/day is calculated by dividing the total cost of goods sold per year by 365 days.<ref>Berman, K., Knight, J., Case, J.: ''Financial Intelligence for Entrepreneurs'', page 151. Harvard Business Press, 2008.</ref> | |||
DPO provides one measure of how long a business holds onto its cash. | |||
DPO can also be used to compare one company's payment policies to another. Having fewer days of payables on the books than your competitors means they are getting better credit terms from their vendors than you are from yours. If a company is selling something to a customer, they can use that customer's DPO to judge when the customer will pay (and thus what payment terms to offer or expect). | |||
Having a greater days payables outstanding may indicate the Company's ability to delay payment and conserve cash. This could arise from better terms with vendors. | |||
DPO is also a critical part of the "Cash Cycle", which measures DPO and the related Days Sales Outstanding and Days Sales of Inventory. When combined these three measurements tell us how long (in days) between a cash payment to a vendor into a cash receipt from a customer. This is useful because it indicates how much cash a business must have to sustain itself. | |||
== See also == | |||
* [[working capital|Working capital analysis]] | |||
* [[Days Sales Outstanding]] | |||
* [[days in inventory|Days In Inventory]] | |||
* [[cash conversion cycle|Cash Conversion Cycle]] | |||
Having more payable days means that the competitor is getting better payment terms. | |||
== Notes == | |||
<references /> | |||
== External links == | |||
* [http://financialpositionblog.com/2009/11/25/basic-instruments-of-working-capital-management/ Basic Instruments of Working Capital Management] | |||
[[Category:Financial ratios]] | |||
Revision as of 15:07, 25 January 2014
Days payable outstanding (DPO) is an efficiency ratio that measures the average number of days a company takes to pay its suppliers.
The formula for DPO is:
where ending A/P is the accounts payable balance at the end of the accounting period being considered and COGS/day is calculated by dividing the total cost of goods sold per year by 365 days.[1]
DPO provides one measure of how long a business holds onto its cash.
DPO can also be used to compare one company's payment policies to another. Having fewer days of payables on the books than your competitors means they are getting better credit terms from their vendors than you are from yours. If a company is selling something to a customer, they can use that customer's DPO to judge when the customer will pay (and thus what payment terms to offer or expect).
Having a greater days payables outstanding may indicate the Company's ability to delay payment and conserve cash. This could arise from better terms with vendors.
DPO is also a critical part of the "Cash Cycle", which measures DPO and the related Days Sales Outstanding and Days Sales of Inventory. When combined these three measurements tell us how long (in days) between a cash payment to a vendor into a cash receipt from a customer. This is useful because it indicates how much cash a business must have to sustain itself.
See also
Having more payable days means that the competitor is getting better payment terms.
Notes
- ↑ Berman, K., Knight, J., Case, J.: Financial Intelligence for Entrepreneurs, page 151. Harvard Business Press, 2008.