Days payable outstanding, or DPO, measures the average number of days it takes a company to pay its accounts payable. DPO equals 365 divided by the result of cost of goods sold divided by average accounts payable. Accounts payable is a type of credit a supplier gives to a company that allows a company to purchase items and pay for them in the future. A higher number of DPO is better for a company because paying bills requires a cash outflow. The longer it can delay paying its accounts payable, the more it can use its cash for other purposes.
Step 1
Find a company's cost of goods sold listed on its income statement in its most recent 10-K annual report. Cost of goods sold is the total cost involved with buying inventory and getting products ready for sale. For example, use $4.4 million in cost of goods sold.
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Step 2
Find the amounts of a company's accounts payable on its balance sheet in its most recent 10-K and the prior year's 10-K. For example, use $500,000 in accounts payable from a company's most recent balance sheet and $600,000 from the company's prior year balance sheet.
Step 3
Add the two amounts of accounts payable and divide by two to find the average accounts payable for the most recent year. Because a balance sheet reports amounts only at a single point at the end of each accounting period, you need to determine the average balance of accounts payable the company held during the year. For example, add $500,000 to $600,000 and divide by two. This equals $550,000 in average accounts payable for the past year.
Step 4
Divide cost of goods sold by the average accounts payable. For example, divide $4.4 million by $550,000, which equals 8.
Step 5
Divide 365 by your result to determine days payable outstanding. In this example, divide 365 by 8, which equals 45.6 days. This means the company takes an average of 45.6 days to pay its suppliers after purchasing inventory.
Tip
You can calculate a company’s quarterly DPO by dividing the number of days in the quarter by the result of cost of goods sold for the quarter divided by the average accounts payable for the quarter.
You can compare a company’s DPO for different accounting periods over time and compare it with its competitors. If a company’s DPO falls over time, its suppliers may be tightening up their payment terms, which could constrain a company’s use of cash.
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