What is DPO?

Days Payable Outstanding (DPO) is a financial ratio that measures the average number of days it takes for a company to pay its own invoices to its suppliers. It is a key component of working capital management.

For Startups: A higher DPO is generally favorable, as it means the company is effectively using the credit extended by its suppliers to finance its operations and is holding onto its cash for a longer period. However, stretching payments too long can damage supplier relationships and lead to supply chain disruptions.

For Businesses: The goal is to manage DPO—paying as late as possible without incurring penalties or harming relationships. This needs to be balanced against potential benefits like early payment discounts.

Calculation: DPO = (Ending Accounts Payable / Cost of Goods Sold) * Number of Days in Period

Example: A company has ₹5 Lakhs in accounts payable and a COGS of ₹30 Lakhs in a quarter (90 days). Its DPO is (5L / 30L) * 90 = 15 days.