Days Payable Outstanding (DPO): Formula, Calculation & Examples
Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content.
Eric is a staff writer at Fit Small Business and CPA focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone.
This article is part of a larger series on Bookkeeping.
Days payable outstanding (DPO) measures the average number of days from when a company purchases inventory and materials from the supplier until it’s paid. The DPO calculation divides average accounts payable (A/P) by annual cost of goods sold (COGS) times 365 days. Bookkeepers should monitor the DPO as part of their A/P management and to guard against vendors being paid either too slowly or too quickly.
Accounting software like QuickBooks Online can quickly generate the reports you need to calculate DPO. If you’re still using Microsoft Word or Excel for your bookkeeping, we recommend you upgrade to QuickBooks. Sign up today and qualify for up to 50% off on a paid subscription.
What Is the DPO Formula?
| DPO | = |
365 days x |
Average Accounts Payable |
The DPO formula can easily be changed for periods other than one year. For instance, you can calculate DPO for a particular quarter by using that quarter’s average A/P and COGS and the number of days in that quarter (about 91 or 92).
By calculating a quarterly DPO, you can compare your cash management across quarters to see any improvements or problems. The DPO formula is valid as long as the number of days in the multiplier is the same as the number of days over which COGS and average A/P are measured.
How To Calculate DPO
In manually computing DPO, you need your balance sheet for the end of the current and prior year and a total purchases report. You can use these documents to identify inventory purchased and to calculate COGS and average A/P.
Step 1: Identify Inventory Purchased
Sum all purchases of inventory—whether paid with cash or credit—for the period. If you use accounting software like QuickBooks, you can run a vendor purchases report and select only the suppliers from which you buy inventory. Exclude payments for noninventory items, such as rent and utilities.
Step 2: Calculate COGS
COGS is the cost of merchandise sold during the year.
Step 2.1: 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
Step 2.2: Subtract ending inventory from goods available for sale to arrive at COGS.
Goods Available for Sale – Ending Inventory = Cost of Goods Sold
For example, Joe’s Sprocket Supplies had the following inventory and purchases:
Inventory as of Dec. 31, 2021 | $ 10,000 |
Inventory as of Dec. 31, 2022 | $ 15,000 |
Inventory Purchased during 2022 | $100,000 |
The goods available for sale and COGS during 2022 are:
Beginning inventory | $ 10,000 |
Inventory purchased during 2022 | $ 100,000 |
Goods available for sale | $110,000 |
LESS: Ending inventory | $ 15,000 |
Cost of goods sold | $ 95,000 |
If your accounting software has good inventory accounting, like QuickBooks Online, you can avoid manually calculating COGS by running a Profit and Loss report, which will show you the COGS for the period.
Step 3: Calculate Average A/P
Average A/P is the amount owed to suppliers during the year. Only include suppliers from which you purchased inventory when calculating DPO―for example, exclude payables to a utility company.
The most common method of calculating the average is to add the beginning and ending A/P and divide by 2:
| Average Accounts Payable | = | Beginning Accounts Payable + Ending Accounts Payable 2 |
Assume Joe’s Sprocket Supplies had the following A/P:
Accounts payable as of Dec. 31, 2021 | $ 6,000 |
Accounts payable as of Dec. 31, 2022 | $10,000 |
The average A/P is calculated as:
($6,000 + $10,000) ÷ 2 = $8,000
Step 4: Get DPO
Once you have calculated average A/P and COGS, you’re ready to calculate DPO―divide average A/P by annual COGS, then multiply by 365 days.
For example, Joe’s Sprocket Supplies’ average A/P is $8,000 and annual COGS is $95,000. Its DPO is 30.7 days (365 X $8,000 ÷ $95,000 = 30.7).
How To Interpret DPO
A high DPO can indicate a struggle to pay suppliers while a low DPO can indicate poor cash management and that vendors are being paid sooner than necessary. Since the best cash management is to pay bills on their due date, a good DPO should be just less than the average payment terms offered by vendors.
If your DPO is lower than your average payment terms, then try to pay your bills closer to, but not after, their due dates. To increase payable days even further, try to negotiate better payment terms with your vendors. Perhaps a supplier will increase your terms from net15 to net30 if you agree to maintain a certain volume of business.
How To Determine Your Optimal DPO
Compare your DPO to the standard payment terms in your industry. If most suppliers allow payment within 30 days (net30), then your optimal DPO should be less than 30 days. If it’s substantially less, perhaps you’re paying your suppliers sooner than necessary or your suppliers aren’t offering you the industry-standard net30 payment terms.
DPOs vary by industry, so comparison with your 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.
How To Generate Profit and Loss & Vendor Balance Reports in QuickBooks Online
With QuickBooks Online, you can easily pull COGS from the P&L report and the A/P from the vendor balance summary report. Here’s a step-by-step guide to generating the reports.
P&L Report
The Profit and Loss report in QuickBooks Online displays your COGS for a specified period. QuickBooks reports COGS adjusted for any change in inventory so that you won’t have to manually calculate it.
Step 1: Navigate to the Reports Center & Search for the Profit and Loss Report
On the left side menu bar, click Reports to access the Reports page. By default, QuickBooks Online sets the Profit and Loss report under favorites. But if you don’t see that report in the Favorites section, use the Search Bar to search for the report.
Reports Window in QuickBooks Online
Step 2: Customize the Report
After clicking the Profit and Loss report, QuickBooks Online will generate the report and date it a day earlier. For example, the date today is June 20, 2022. QuickBooks Online’s Profit and Loss report period will be from January 1, 2022, to June 19, 2022. You may adjust the period to include today’s date. In our report below, we maxed it up to June 30, 2022.
If you click Customize, you can access more customization options, such as number formats, accounting method, and filters.
The report below shows COGS of $6,640 for the period of January 1, 2022, through June 30, 2022:
Sample Profit and Loss report in QuickBooks Online
Vendor Balance Summary Report
In the Reports window, look for the Vendor Balance Summary report using the search bar. Click the report name, and QuickBooks Online will generate a report for all dates.
Step 1: Customize the Report Period
Since QuickBooks Online reports all vendor balances for all dates, adjust the report period of this report to match the report period of the income statement. Click the drop-down menu and choose the period you want. In our income statement above, our report period ends on June 30, 2022. Hence, we did the same for the vendor summary report below.
Adjusting the Report Period of the Vendor Balance Summary Report
Step 2: Generate a Vendor Balance Summary for Beginning & Ending Balances
Our DPO formula requires us to determine the average A/P. Hence, we should generate a beginning and ending vendor balance summary report.
For the beginning balance report, we should date our report as of December 31 of the previous year.
Vendor Balance Summary as of December 31, 2021, for Beginning Vendor Balances
We do the same process for our ending balance. In our sample above, our end-of-period date is June 30, 2022.
Bottom Line
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, whereas 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. It allows you to run several reports that will provide all the information you need not only to calculate DPO but also to analyze cash flow and profitability. Sign up today and choose from 50% off for three months or a 30-day free trial.
