How to calculate days payable outstanding
Days Payable Outstanding (DPO) is a financial metric that businesses use to determine the average number of days it takes to pay their suppliers for goods and services purchased on credit. By calculating DPO, companies can better understand their cash flow management, supplier relationships, and overall financial efficiency. In this article, we will walk you through the steps of calculating DPO for your company.
The Formula for Calculating DPO
Days payable outstanding can be calculated using the following formula:
DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days
– Accounts Payable represents the amount a company owes its suppliers
– Cost of Goods Sold (COGS) refers to the direct cost of producing goods or providing services
– The Number of Days is generally considered as either a quarter (90 days) or a year (365 days)
Step-by-Step Guide to Calculate DPO
Step 1: Determine Your Accounts Payable
Gather your company’s accounts payable information. This information can typically be found on your balance sheet or general ledger. Accounts payable represents the money owed by your company to its suppliers for goods and services provided on credit.
Step 2: Calculate Your Cost of Goods Sold (COGS)
Next, determine your cost of goods sold during the specified time period. You can find this information on your income statement. COGS includes direct expenses such as raw materials and labor costs associated with producing the good or service.
Step 3: Choose the Time Period
Decide whether you want to calculate DPO for a quarter or an entire year. For most companies, calculating DPO on a quarterly basis provides more accurate and actionable insights as it shows short-term changes in payment performance.
Step 4: Apply the DPO Formula
Now that you have gathered all necessary information, apply the formula to calculate your company’s DPO.
Example: If your accounts payable is $50,000, the cost of goods sold is $200,000, and you want to calculate DPO for a quarter, use the formula:
DPO = ($50,000 / $200,000) x 90
DPO = 0.25 x 90
DPO = 22.5
In this example, the company takes an average of 22.5 days to pay its suppliers.
Understanding your company’s days payable outstanding (DPO) metric can help you make more informed decisions about cash flow management and supplier relations. Regularly monitoring and evaluating DPO can also enable businesses to identify areas for improvement in payment processes and optimize their working capital. By following these steps and using the DPO formula, you can gain valuable insights into your company’s financial efficiency.