DPO is a financial metric that measures the average number of days it takes a company to pay its suppliers and vendors for goods and services received. In other words, it measures how long a company takes to pay its bills.
DPO is an essential metric, because it helps businesses manage their cash flow effectively. By extending the time it takes to pay their bills, companies can hold onto their cash for longer, which can be especially important during times of economic uncertainty. Moreover, by optimizing their DPO, businesses can strengthen their relationships with suppliers and vendors by demonstrating that they are reliable and financially stable.
To calculate DPO, you'll need to know your accounts payable balance (the amount of money you owe to your suppliers and vendors) and your cost of goods sold (COGS) for a given period. Then, you can use the following formula:
DPO = (Accounts Payable / COGS) x Number of Days in the Period
For example, let's say that your accounts payable balance is $50,000, and your COGS for the past year was $200,000. If the period in question is one year, the calculation would be:
DPO = ($50,000 / $200,000) x 365 = 91.25 days
This means that, on average, it takes your company 91.25 days to pay its bills.