Don’t let days payable outstanding drag on your business!
What are days payable outstanding (DPO)? Days payable outstanding, or DPO, refers to the number of days that have passed since an invoice was due, but not yet paid. In other words, it’s the number of days your business is still owed money by your clients; in most cases, the longer you have to wait for payment, the greater your risk of losing money because of interest on unpaid invoices and fees from late payments or collections. The good news?
What are the 3 main factors affecting DPO?
A couple of the most common factors that can impact DPO are accounts receivable balance and percentage of sales in accounts receivable. The formula for calculating DPO is:
DPO = (Accounts Receivable + Cash Equivalents) / Day’s Sales
This figure is then multiplied by 365 to give the number of days it will take to pay off current bills.
How do I calculate DPO?
The formula for Days Payable Outstanding is (Number of days * Number of bills)/Total payables, where bills refers to any and all expenses that need to be paid. And you’re looking for the number of elapsed days (i.e., how many days there are in a year) multiplied by the number of overdue bills: a simple equation that allows you to see at a glance whether you’re staying within your financial obligations. Consider the following example:
If there are 150 total payables, and the number of months’ worth is 24, then divide one hundred fifty by twenty-four to get six; round up or down to whatever seems best depending on personal preference. You might have DPO at 6 (plus or minus some rounding).
The Formulas Explained
DPO is calculated by adding all open invoices, subtracting any payments already made, and dividing the result by the number of days in the period. A high DPO reflects more time that has elapsed since vendors were paid. The higher a company’s DPO, the less cash they have available to pay their suppliers and employees. This is why it’s important to regularly monitor your DPO and ensure it doesn’t become too large.
How to Calculate Days Sales Outstanding (DSO)
DSO is a measure of how long it takes for a company to collect payments from customers. It indicates the average number of days that a company waits after receiving credit before receiving funds from customers. The higher the number, the less cash flow, and vice versa. This metric can be calculated as:
{DPO} ÷ {Receivables} = {DSO}
What About Vendor Scorecards?
No vendor is perfect, but you can use scorecards to assess the risk and reward associated with each. Use a scoring scale of 1-5:
1 = Poor Risk/Unacceptable Reward 2 = Elevated Risk/Acceptable Reward 3 = Acceptable Risk/Acceptable Reward 4 = Low Risk/Acceptable Reward 5 = No Risk/Favorable Reward
If you see any vendor with a score of 2 or less, seriously consider eliminating it from the budget or replacing them.
When should I use DPO and DSO?
DPO and DSO are useful to track your company’s cash flow by giving you an indication of how much money is left in the company, which in turn gives you a better sense of whether or not the company will be able to pay off what they owe.
Both are often referred to as liquidity ratios.
DPO stands for Days Payable Outstanding. It measures how many payments have been made and compares that number to the amount still owed. As long as this ratio remains at 0, the company has no problems with paying back what it owes.
DSO stands for Days Sales Outstanding and it tracks how many sales invoices were made but not yet paid out.
