Days payable outstanding (DPO) measures how long a company takes to pay its suppliers. For scaling businesses, managing DPO is a key lever for cash flow and growth. Stretch it too far, and you risk supplier frustration. Pay too quickly, and you could tie up funds that could fuel business operations.
This guide explains the meaning of DPO and how Moss’ Accounts Payable (AP) Automation helps maintain the right balance — keeping suppliers happy while optimising cash flow.
What’s DPO?
DPO finance involves timing payments thoughtfully. The purpose is striking the right balance between preserving cash and maintaining good supplier relationships.
By tracking this metric, finance teams can see how long money stays in the business before going towards invoices. This helps them manage cash flow and optimise working capital for operations or investments.
While norms vary by industry, finding your optimal DPO can free up significant working capital to fuel growth initiatives. Here’s how to do it.
How to calculate days payable outstanding: 2 methods
There are two ways to calculate DPO, depending on the data you have available. The key is to pick one method and stick with it. Switching between approaches can make trend analysis unreliable and mislead financial insights. Below are the two options.
I. Payable days formula
The most accurate way to calculate DPO is to use the company’s average AP. To do so, take AP balances from the start and end of the year, add them together, then divide by two.
Imagine your beginning AP balance is £400,000, and your ending AP balance is £500,000. Here’s how it would break down:
- Average AP = (£400,000 + £500,000) / 2
- £400,000 + £500,000 = £900,000
- £900,000 / 2 = £450,000
- Average AP = £450,000
Once you have that number, you can plug it into the full formula:
DPO = (Average Account Payable / Cost of Goods Sold) x Number of Days
Say you find the following information:
- Average AP: £450,000
- Cost of Goods Sold (COGS): £3,550,000
- Days in period: 365
You’d calculate DPO like so:
- DPO = (£450,000 / £3,550,000) x 365
- £450,000 / £3,550,000 = 0.1268
- 0.1268 x 365 = 46
- DPO = 46 days
II. Ending accounts payable
For a fast estimate, you can skip the average AP calculation and just use the year-end AP balance in the formula:
DPO = (Year-end AP / COGS) x 365
Here’s how it would look if you plug in the same numbers as above:
- DPO = (£500,000 / £3,550,000) x 365
- £500,000 / £3,550,000 = 0.1408
- 0.1408 x 365 = 51
- DPO = 51 days
Why DPO matters for cash flow and supplier relationships
A higher DPO means more liquid assets↗ available for operational needs, reducing reliance on overdrafts or credit lines. Pushing payment terms too far, however, can force suppliers to demand faster payment, prioritise other customers, or impose less favourable terms on your company.
If your DPO rises from 40 to 55 days, for instance, you’re holding on to cash for an extra two weeks. That can help smooth payroll or cover a seasonal dip. But if you stretch payments too long, a key supplier might shorten your terms or halt shipments until invoices are cleared.
Conversely, paying a few days early might reduce short-term cash on hand, but it could help you negotiate an early-payment discount or secure priority production slots.
The DPO optimisation playbook
Finance teams have key tactics to optimise DPO without jeopardising supplier ties. Moss’ automation tools make it easy to apply each strategy efficiently at scale. That includes your supplier management approach, starting with how you apply the 80/20 supplier optimisation rule.
Apply the 80/20 supplier optimisation rule
Not all suppliers are equal, so start by ranking them by annual cost. Typically, around 20% of vendors account for 80% of your total spend — these are the relationships that matter most.
Give your top suppliers extra attention: You might negotiate longer payment terms in exchange for volume commitments or focus on early-payment discounts to save money. By prioritising the vendors that drive most of your spend, you can make smarter, more impactful decisions.
Moss’ AP platform automatically segments your suppliers by spend and priority, flagging which suppliers need strategic attention versus standard processing.
Use accounts payable automation and supply chain finance
Manual AP cycles↗ make strategic payment timing nearly impossible. Spreadsheets and email threads increase errors, delay approvals, and bury invoices.
Moss changes this. Using optical character recognition, it extracts key details like due dates and line items, matches them against purchase orders, and automates reconciliation↗.
Invoices then follow your present approval rules — under £1,000 might need one signature, and over £10,000 could require department head approval.
Our real-time dashboards show upcoming payment obligations within 30, 60, and 90 days. This helps you implement accurate forecasts and month-end close best practices↗. Financial teams can spot cash crunches early and make projections that support the company’s overall financial health.
Track the percentage of invoices paid on time
Effective invoice payment timing affects both working capital and supplier relationships. Calculate your days payable outstanding to see how long your company takes to cover invoices after receiving goods or services. This metric offers insight into how efficiently you’re managing cash while meeting payment obligations.
Moss’ AP platform↗ makes managing company spending easy and stress-free. It combines corporate cards, expense tracking, and invoice processing into one platform, so finance teams don’t have to chase receipts or approvals.
Connecting DPO to the cash conversion cycle
DPO is one piece of your cash conversion cycle (CCC), which tracks how long cash is tied up in operations before coming back from sales. To calculate CCC, you also need the days inventory outstanding (DIO) and the days sales outstanding (DSO).
Using the following info, we’ll calculate DIO, DSO, and CCC.
- Beginning inventory: £580,000
- Ending inventory: £620,000
- Accounts receivable: £400,000
- COGS: £3,550,000
- Total credit sales: £5,000,000
- Days in period: 365
Average inventory
This is the typical amount of stock you have on hand, found by averaging the beginning and ending inventory.
Average inventory = (Beginning Inventory + Ending Inventory) / 2
So, using the above numbers, this would be (£580,000 + £620,000) / 2 = £600,000
DIO
DIO is how long your inventory usually sits before it gets sold.
DIO = (Average Inventory / Cost of Goods Sold) x Number of Days
Here’s how it breaks down:
- DIO = (£600,000 / £3,550,000) x 365
- £600,000 / £3,550,000 = 0.1690
- 0.1690 × 365 = 62
- DIO = 62 days
DSO
This is how many days it takes, on average, to get paid after making a sale.
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days
Below are the calculations:
- DSO = (£400,000 / £5,000,000) x 365
- £400,000 / £5,000,000 = 0.08
- 0.08 × 365 = 29
- DSO = 29 days
DPO
DPO is how long you usually wait to pay your suppliers.
- DPO = (£450,000 / £3,550,000) x 365
- £450,000 / £3,550,000 = 0.1268
- 0.1268 x 365 = 46
- DPO = 46 days
CCC
This is how many days it takes to turn what you spend on inventory into cash from sales, after factoring in payments to suppliers.
CCC = (DIO + DSO) − DPO
After gathering all the information above, plug it into the CCC formula:
- CCC = (62 + 29) − 46
- 62 + 29 = 91
- 91 − 46 = 45
- CCC = 45 days
On average, it takes 45 days from paying for inventory to collecting cash from sales, after accounting for the time available to pay suppliers.
Optimising DPO for smarter cash flow management with Moss
Reducing inventory can risk stockouts, and accelerating customer collections may strain relationships. Optimising DPO is often the fastest, least disruptive way to improve working capital. It maximises cash on hand without changing operations and renegotiating customer terms.
Moss’ AP Automation↗ makes this effortless — capturing, approving, and scheduling invoices while providing real-time insights. This way, companies can optimise the entire cycle through smart, data-driven decision-making.
