How to Calculate Days Payable Outstanding (DPR)

Days Payable Outstanding (DPO) is a financial metric that assesses how efficiently a company manages payments to its suppliers. It provides insight into a company’s cash flow management and its relationships with trade creditors.

What Days Payable Outstanding Represents

Days Payable Outstanding (DPO) represents the average number of days a company takes to pay its trade creditors, such as suppliers and vendors, after receiving an invoice. It indicates how effectively a business manages its short-term liabilities and cash outflows. A higher DPO suggests a company takes longer to pay its bills, allowing it to retain cash for a longer duration. Conversely, a lower DPO indicates a company pays its suppliers more quickly. This metric provides a snapshot of a company’s payment practices over a specific accounting period.

Locating the Necessary Financial Data

Calculating Days Payable Outstanding requires two primary pieces of financial information: Cost of Goods Sold (COGS) and Accounts Payable (AP).

COGS represents the direct costs a company incurs to produce the goods it sells, such as raw materials, direct labor, and manufacturing overhead. This figure is found on a company’s Income Statement.

AP refers to the short-term debt a company owes to its suppliers for goods or services purchased on credit. This figure is found on a company’s Balance Sheet, under the current liabilities section. Accounts payable is considered a current liability because these obligations are generally due within a short period.

For a more accurate representation of payment practices over a period, it is beneficial to use an average Accounts Payable figure rather than just the balance at the end of the period. This average is calculated by summing the beginning and ending Accounts Payable for the period, then dividing by two. Using an average helps smooth out fluctuations in the Accounts Payable balance, providing a more consistent view of the company’s payment behavior.

Step-by-Step DPO Calculation

Once you have gathered the necessary financial data, the calculation of Days Payable Outstanding is straightforward. The formula for DPO is: DPO = (Average Accounts Payable / Cost of Goods Sold) Number of Days in Period. The “Number of Days in Period” typically refers to 365 days for an annual calculation, or 90 days for a quarterly calculation.

To illustrate, consider a company with an average Accounts Payable of $50,000 and a Cost of Goods Sold of $300,000 for an annual period. First, divide the average Accounts Payable by the Cost of Goods Sold ($50,000 / $300,000 = 0.1667). Then, multiply this result by the number of days in the period, which is 365 for an annual calculation (0.1667 365 = 60.83). This indicates the company takes approximately 61 days, on average, to pay its suppliers.

For another example, imagine a company reports an average Accounts Payable of $75,000 and a Cost of Goods Sold of $450,000 over a fiscal year. The first step involves dividing $75,000 by $450,000, which yields 0.1667. Multiplying this by 365 days results in a DPO of approximately 60.83 days.