The days payable outstanding (DPO) ratio is extremely important. It shows how long it takes you to pay your suppliers which is a key component in your company’s formula for calculating working capital. Businesses must maintain proper amounts of working capital to pay for daily operations and to finance future growth. Include a DPO calculation in your monthly management accounting reports and explain any reasons for variances.
The formula
DPO is calculated using the formula: Average AP balance/Cost of goods sold per day. Where:
For example, AP Ltd had an average trade creditor balance of £500,000 and the cost of goods sold in the year to June 30 was £5m. AP Ltd’s DPO for the year to June 30 is 36 days (£500k/(£5m/365)). If AP Ltd’s average supplier terms are 30 days, the suppliers may be getting a little jumpy since your are taking 36.5 days on average to pay their bills.
You simply enter your raw data on our Days Payable Outstanding Worksheet, and it will work out the DPO for you.