Days payable outstanding (DPO) measures the number of average days from when a company purchases inventory and materials until the supplier is paid. The DPO calculation divides average accounts payable by annual cost of goods sold times 365 days. A higher DPO indicates that the company is taking longer to pay its suppliers.
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What Days Payable Outstanding Is
Days payable outstanding is a measure of how many days it takes for a company to pay their suppliers. A high DPO can indicate a struggle to pay suppliers while a low DPO can indicate poor cash management. Since bills should be paid on their due date, a good DPO should be just less than the average payment terms offered by vendors.
The days payable outstanding formula is:
Average Accounts Payable / Annual Cost of Goods Sold X 365 Days
The DPO formula can easily be changed for periods other than one year. The formula is valid as long as the number of days in the multiplier is the same as the number of days over which cost of goods sold is measured. See this later section for more details about this and other ways to customize the DPO calculation.
How to Calculate Days Payable Outstanding
To calculate days payable outstanding, you need your balance sheet for the end of the current and prior year and a total purchases report. You can use these reports to identify inventory purchased and to calculate cost of goods sold and average accounts payable. Once you have these numbers, you can plug them into the formula to get your days payable outstanding.
1. Identify Inventory Purchased
Sum all purchases of inventory for the period whether paid with cash or credit. If you use accounting software like QuickBooks, you can run a vendor purchases report and select only the suppliers from which you buy inventory. Do not include payments for non-inventory items such as rent and utilities.
2. Calculate Cost of Goods Sold
Cost of goods sold is the cost of merchandise sold during the year. First, calculate the goods available for sale during the year by adding purchases to beginning inventory, which is the same as ending inventory from the prior year.
Beginning Inventory + Purchases = Goods Available for Sale
Second, subtract ending inventory from goods available for sale to arrive at cost of goods sold.
Goods Available for Sale – Ending Inventory = Cost of Goods Sold
Example: Assume a Joe’s Sprocket Supplies had the following inventory and purchases:
Inventory as of Dec. 31, 2018: $10,000
Inventory as of Dec. 31, 2019: $15,000
Inventory Purchased during 2019: $100,000
The goods available for sale during 2019 is:
$10,000 + $100,000 = $110,000
Cost of goods sold during 2019 is:
$110,000 – $15,000 = $95,000
If you have an accounting system, you can avoid calculating cost of goods sold by hand by running a profit and loss report, which will show you the cost of goods sold for the period. However, this cost of goods sold figure is only accurate if the beginning and ending inventory in the accounting system is correct.
3. Calculate Average Accounts Payable
Average accounts payable is the average amount owed to suppliers during the year. Only include suppliers from which you purchased inventory when calculating days payable outstanding. For example, don’t include the payable to the utility company since utility expense is not included in inventory purchased.
The most common method of calculating the average is to add the beginning and ending accounts payable and divide by 2:
Beginning Accounts Payable + Ending Accounts Payable / 2 = Avg Accounts Payable
Example: Assume Joe’s Sprocket Supplies had the following accounts payable:
Accounts payable as of Dec. 31, 2018 = $6,000
Accounts payable as of Dec. 31, 2019 = $10,000
The average accounts payable is calculated as:
$6,000 + $10,000 / 2 = $8,000
4. Calculate Days Payable Outstanding
Once you have calculated average accounts payable and Cost of Goods sold, you are ready to calculate Days Payables Outstanding. Days payable outstanding is average accounts payable divided by cost of goods sold times 365 days.
Average Accounts Payable / Annual Cost of Goods Sold X 365 Days
Example: Joe’s Sprocket Supplies’ average accounts payable is $8,000, and its annual COGS is $95,000. The days payable outstanding is 30.7 days.
Here is the DPO calculation for Joe’s Sprocket Supplies:
$8,000 / $95,000 = 30.7 Days
QuickBooks Online users can learn how to run these reports in the reports you can generate section below. If you don’t use accounting software, you need to manually calculate average accounts payable and cost of goods sold.
Alternative Formulas for Days Payable Outstanding
Various websites and sources may provide different formulas for days payable outstanding. Rest assured, these alternative formulas give you the same result as the formula in this article. Feel free to choose whichever formula is easiest to remember or makes sense to you.
Some common alternatives that arrive at exactly the same days payable outstanding figure are:
Average Accounts Payable X 365 / Annual Cost of Goods Sold
Average Accounts Payable / Annual Cost of Goods Sold / 365
How to Interpret Days Payable Outstanding
Days payable outstanding shows how long it typically takes you to pay your suppliers for inventory and materials. A low DPO could mean the company is paying its suppliers sooner than necessary. A high DPO could mean the company is having cash flow problems and is having trouble paying their suppliers on time.
How to Determine Your Optimal DPO
Compare your DPO to the standard payment terms in your industry. If most suppliers in your industry allow payment within 30 days (Net30) then your optimal DPO should be just less than 30 days. If it is substantially less, perhaps you are paying your suppliers sooner than necessary or your suppliers are not offering you the industry standard Net30 payment terms.
DPOs vary by industry, so comparison to your industry peers can be useful. Avoid comparisons to much larger companies as they may be able to demand longer payment terms than are available to you.
Days Payable Outstanding Examples
The following examples can help you understand how to interpret days payable outstanding using two fictitious companies, ABC and XYZ Companies.
Days Payable Outstanding at ABC Company
ABC Company, a retailer that buys and sells a variety of widgets, had the following results for 2019:
Total purchases of widget inventory
Widget inventory as of Dec. 31, 2018
Widget inventory as of Dec. 31, 2019
Accounts payable to widget suppliers as of Dec. 31, 2018
Accounts payable to widget suppliers as of Dec. 31, 2019
All of ABC Company’s Widget suppliers provided payment terms of Net30, meaning that ABC has 30 days to pay the supplier without incurring any late fees.
Average accounts payable for ABC is calculated as:
$4,000 Beg AP + $5,000 End AP / 2 = = $4,500 Avg AP
Cost of goods sold for ABC is calculated:
$15,000 Beg Inv + $150,000 Purchases = $165,000 Goods Available for Sale
$165,000 Goods Available for Sale – $25,000 End Inv = $140,000 Cost of Goods Sold
Using this information, days payable outstanding is calculated as:
$4,500 Avg Accounts Payable / $4,500 Avg Accounts Payable X 365 = 11.7 Days
It appears that ABC Company is paying its widget suppliers much too quickly. While they are given 30 days to make payment, they take less than 12 days. This is poor cash management. ABC could have held its cash for another 18 days and used it some other way, such as temporarily paying down a line of credit or earning interest in a savings account.
Days Payable Outstanding at XYZ Company
XYZ Company, a manufacturer that buys raw materials to build gadgets, has the following results for 2019.
Total purchases of raw materials
Materials inventory as of Dec. 31, 2018
Materials inventory as of Dec. 31, 2019
Accounts payable to material suppliers as of Dec. 31, 2018
Accounts payable to material suppliers as of Dec. 31, 2019
All of XYZ Company’s material supplies provided payment terms of Net30, meaning that XYZ has 30 days to pay the supplier without incurring any late fees.
Average accounts payable for XYZ is calculated:
$20,000 Beg.AP + $15,000 End AP / 2 = $17,500 Avg AP
Cost of goods sold for XYZ is calculated:
$10,000 Beg Inv + $100,000 Purchases = $110,000 Goods Available for Sale
$110,000 Goods Available for Sale – $5,000 End Inv = $105,000 Cost of Goods Sold
Days payable outstanding is calculated:
$17,500 Avg Accounts Payable / $105,000 Annual Cost of Goods Sold X 365 = 60.8 Days
XYZ Company took an average of nearly 61 days to pay its suppliers. This is double the 30 days allowed by XYZ’s suppliers. XYZ might be having cash flow problems only made worse by the late payment penalties imposed by their suppliers. Alternatively, 61 days may be reasonable for XYZ. The company may have a long operating cycle because it takes a while for the manufacturing process to turn raw materials into cash. Perhaps XYZ can find suppliers that understand its long operating cycle and can provide longer payment terms, such as Net60.
Reports You Need to Compute Your Days Payable Outstanding
Before calculating days payable outstanding, you need accounts payable to your suppliers at the end of the current and prior year. Notice that accounts payable at the end of the prior year is the beginning balances for the current year. You also need cost of goods sold during the current year.
How to Generate a Profit and Loss Report in QuickBooks Online
The Profit and Loss report in QuickBooks Online displays your cost of goods sold for a specified period. QuickBooks reports cost of goods sold adjusted for any change in inventory so you won’t have to manually calculate cost of goods sold.
1. Navigate to the Reports Center
Click on Reports in the lower left menu bar as shown:
2. Run the Profit and Loss Report
Scroll to the Business overview section and run the Profit and Loss report as shown:
3. Select the Reporting Period and Run the Report
Above the report, select the correct reporting period and click the Run report button as shown:
The report below shows the cost of goods sold of $23,100 during the year:
How to Generate a Vendor Balance Summary Report in QuickBooks Online
1. Navigate to the Reports Center
Click on Reports in the lower left menu bar as shown:
2. Run the Vendor Balance Summary Report
Scroll to the What you owe section and click on Vendor Balance Summary as shown:
3. Customize the Report
Click on the gray Customize button in the upper right corner of the report. Enter the report period as the last day of your reporting period. Click the Aging drop-down menu and select the aging method as report date. Select the Filter drop-down menu and place a check mark next to Vendor. In the Vendor drop-down box, select only the suppliers from which you buy inventory as shown below:
4. Run the Report
The report below shows the accounts payable to inventory suppliers of $1,100 at the end of 2019:
5. Run the Same Report for Beginning Accounts Payable
Run another vendor balance summary report for beginning accounts payable by clicking Customize again and changing the date to the end of the prior reporting period. The report below shows accounts payable to inventory suppliers of $1,500 at the beginning of 2019:
Days Payable Outstanding Calculation for the Sample Company
The days payable outstanding can be calculated from the reports generated by QuickBooks Online as shown:
$1,500 Beg.AP + $1,100 End AP / 2 = $1,300 Avg AP
$1,300 Avg Accounts Payable / $23,100 Annual Cost of Goods Sold X 365 = 20.5 Days
Accounting software such as QuickBooks Online will enable you to quickly calculate many important financial ratios to help you evaluate your company’s strengths and weaknesses. In addition, it will reduce the time and hassle of daily tasks such as tracking bills and writing checks. For a limited time, you can save up to 50%.
Customize DPO For Your Purpose
If a bank or creditor is requesting your days payable outstanding, then it is best to follow the guidelines above. However, when you’re using DPO to evaluate your company don’t be afraid to adjust it to your needs.
Below are a few suggestions on how to customize your days payable outstanding calculation:
Adjust the length of time period
DPO calculations can be adjusted to a quarterly measure by determining cost of goods sold for the quarter and multiplying by 90 days instead of 365. Similarly, it can also be done monthly by using monthly cost of goods sold and multiplying by the number of days in the month. This might be useful if your business is seasonal and you want to see how DPO varies during the year.
Adjust the Calculation of Average Accounts Payable
Your DPO calculation may be more accurate with an average of accounts payable that considers the balance throughout the year instead of only the beginning and ending balance. Perhaps use a monthly average by adding the monthly balance in accounts payable and dividing by 12. This might be especially useful if the beginning and ending accounts payable is not very representative of the balance throughout the year.
Average Accounts Payable at Holiday Supplies, Inc.
Holiday Supplies, Inc. is a retailer of holiday supplies. Because it buys a large amount of its annual inventory in the first week of December its accounts payable at the end of each year is much higher than throughout the rest of the year.
Below is the accounts payable balance at the end of each month for Holiday Supplies, Inc.
Accounts Payable Balance
$12,000 Beg.AP + $15,000 End AP / 2c = $13,500 Avg AP
The average accounts payable for Holiday Supplies, Inc. using a monthly average is:
$2,000+$500+$700+$300+$500+$700+$2,500+$1,200+$800+2,000+$7,000+$15,000 / 12 = $2,767 Avg AP
Because of the seasonal nature of Holiday Supplies, Inc., the average accounts payable and DPO is inflated by using only the beginning and ending balances in the average. The beginning and ending balances are not representative of the balance throughout the year.
Compare DPO across suppliers
DPO can be calculated for a particular supplier by including only accounts payables and cost of goods sold from that supplier. Calculating DPO by supplier is useful to determine if you are taking full advantage of a particular supplier’s payment terms. In other words, it might identify a supplier you are paying in 14 days on average while they only require payment within 30 days.
Calculate for Operating Payable and Expenses
The traditional DPO discussed above is only useful for purchases of inventory. You can modify it to look at other payables. For example, you might want to calculate days payable outstanding for administrative expenses such as utilities, telephone, and internet. In that case, the accounts payable to include are the amounts owed to all your utility, telephone, and internet providers at the beginning and end of the year. The expenses to include are your total utility, telephone and internet bills received during the year.
You can be creative when performing DPO calculations. As long as you use payables and expenses from the same vendors, you will have a meaningful DPO.
Pros and Cons of Using Days Payable Outstanding
There are pros and cons of using days payable outstanding. On the positive side, DPO provides easy to interpret results. It’s not hard to understand what it means to pay your suppliers in a certain number of days. On the negative side, it’s hard to determine what an optimal DPO should be for your company.
Pros of Days Payable Outstanding
The pros of using days payable outstanding are:
- Easy to understand result: The days it takes to pay your suppliers is much easier to understand than similar measures such as the accounts payable turnover ratio.
- Easy to compare to payment terms: Because it’s stated in days, it is easy to compare your DPO to common payment terms (such as Net30) to determine if you are taking full advantage of the payment terms.
- Can compare to industry peers: By comparing your DPO to similar-sized companies in your industry you can tell if they might be getting better payment terms from their suppliers. Publicly-traded companies must disclose their annual financial statements and usually produce an annual report available on their website. Information for other companies is harder to find, but your industry association may have some industry averages available for your comparisons.
Cons of Days Payable Outstanding
The cons of using days payable outstanding are:
- Difficult to determine optimal value: A lower value is not always better because it might signal your company is paying suppliers too quickly and not taking advantage of generous payment terms.
- Doesn’t provide information about individual suppliers: The DPO is an average and doesn’t tell you if you are paying all your suppliers on time. You should regularly review your accounts payable aging report to determine how you are doing with individual suppliers.
- Hard to compare to other companies: The size and industry of other companies has a large impact on their DPOs. It’s probably not realistic to expect your small business to have as high a DPO as a giant company that can demand longer payment terms.
Days payable outstanding is easy to understand as it is simply the average number of days it takes you to pay your suppliers. However, knowing whether your DPO is ideal is a little more difficult. The best use of DPO might be for comparison to similar-sized industry peers or comparison to the standard payment terms for your industry.
Frequently Asked Questions (FAQs) About Days Payable Outstanding
This section includes the most frequently asked questions about days payable outstanding.
How do you calculate days payable outstanding?
The formula for days payable outstanding is average accounts payable divided by annual cost of goods sold times 365. Average accounts payable is usually calculated as beginning accounts payable plus ending accounts payable divided by 2.
What does high payable days mean?
High payable days means the company has been able to get generous payment terms from suppliers (such as Net60), or the company is struggling with cash flow and is unable to timely pay suppliers. A lower payable days is not always better as it might mean the company is paying their suppliers sooner than necessary.
How can I increase my payable days?
You can increase payable days by paying your suppliers on or near due dates, but not any sooner. To increase payable days even further, try to negotiate better payment terms. Perhaps a supplier will increase your payment terms from Net15 to Net30 if you agree to maintain a certain volume of business.
Days payable outstanding reports how many days it takes to pay suppliers. Too low a value indicates you may be paying suppliers sooner than necessary and too high a value indicates you may have cash flow problems. The optimal value should be slightly less than the standard payment terms given by your suppliers.
The information to calculate days payable outstanding can be gathered quickly using accounting software like QuickBooks. QuickBooks allows you to run several reports that will provide all the information you need not only to calculate days payable outstanding, but also analyze cash flow and profitability. Sign up today and you can qualify for up to 50% off a paid subscription.