Days Payable Outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The calculation for DPO is the sum of accounts payable divided by 365.
While there are several benefits of having a low DPO such as improved cash flow and better negotiating power with suppliers, it can also indicate that the company is struggling financially or experiencing liquidity problems. Factors that can influence DPO include payment terms from suppliers, credit risk associated with those suppliers, and how quickly the company pays its own bills.A high DPO could be an indicator of inefficient operations or poor financial management. In some cases, it may be due to too much reliance on credit from suppliers rather than generating cash through sales. When this happens, it can lead to difficulty in meeting short-term obligations and even bankruptcy if not corrected quickly. Conversely, a low DPO could mean that the company is not taking advantage of early payment discounts from its vendors or has healthy cash flow which allows it to take longer to pay its bills without penalty.
