What does days payable outstanding show?
A company with a high DPO takes longer to pay its vendors and suppliers than a company with a low DPO. There’s no clear-cut standard for what constitutes a “good” DPO. The average will vary based on a number of factors, including the industry and the company’s size and bargaining power.
In general, though, a high DPO is considered a positive. If a company has a higher DPO than its competitors, it’s often a sign that the company is effectively using its cash on hand for short-term investment opportunities. For example, if a company’s contracts with vendors state that invoices must be paid within 45 days and a company has a DPO of 10, the company could have earned 35 days’ worth of interest if it had held onto its cash. A high DPO can also indicate that a company has more favorable credit terms than its competitors.
However, if a company’s DPO is unusually high compared to similar businesses, it could be a sign that the company is having trouble paying its bills. If a company takes too long to pay its accounts receivable, suppliers may respond by restricting its credit terms.
A low DPO can be a sign that a company isn’t efficiently using its cash or that its vendors have tightened credit. But a low DPO isn’t necessarily bad. Sometimes a company will pay invoices to improve relationships with suppliers or because suppliers offer a discount for early payment.
Days sales outstanding (DSO) is a related metric that shows the average number of days it takes a company to collect payments for invoiced goods and services. To maximize cash, a company should aim for a high DPO and a low DSO, which indicates that a company pays slowly but gets paid quickly.
