In contrast, Days Sales Outstanding (DSO) measures the average number of days spent collecting a customer’s payment. Both dimensions are critical in evaluating a company’s cash flow management and general financial health. Days Payable Outstanding (DPO) measures the average time a company takes to pay its bills and supplier invoices. Calculating DPO allows a company to see how well it manages accounts payable and cash flow. However, both the situations elated to days payable outstanding ratio suggest that the business will have free cash flows left for usage for other operational purposes. But in the process, it is necessary to maintain a balance between making payments and maintaining good relationship with suppliers and vendors.

Definition – What is Days Payable Outstanding (DPO)?

• They can be calculated for any time period, but most often on a 365-day basis.
• Together with DPO, these metrics provide deeper insight into a SaaS company’s financial health.
• This guide will break down the DPO calculation, explain what good and bad DPO numbers are, provide average benchmarks, and detail strategies to optimize days payable outstanding.
• The payment process to the creditors varies from company to company and is measured in terms of Days Payable Outstanding (DPO).
• The difference between the time they purchase from the supplier and the day they make the payment to the supplier is called DPO.

Usually, this results in a longer DPO, allowing the company to keep cash on hand a little longer without rocking its relationships with suppliers. Net burn, also known as burn Law Firm Accounts Receivable Management rate, measures the rate at which a company spends its capital to finance overhead before generating positive cash flow from operations. This metric is particularly relevant to B2B SaaS startups in the expansion stage. A low DPO means that you’re paying invoices too frequently, impeding cash flow. A slightly higher DPO shows that a business has strong working capital.

What is the cash conversion cycle (CCC)?

This strategy is often particularly effective in the SaaS industry, where maintaining strong supplier relationships and optimizing operational costs are critical. You can reduce the company’s overall costs by taking advantage of suppliers’ early payment discounts. Sure, this might lead dpo formula to a shorter DPO as payments are made sooner, but the cost savings often outweigh any benefits of holding onto cash a little longer.

• In contrast, Days Sales Outstanding (DSO) measures the average number of days spent collecting a customer’s payment.
• For example, let’s say the Days Payable Outstanding industry average for retail is around 30 days, but for manufacturing, it’s 60 days.
• With fast calculations within Excel, your team can get a handle on the data and make data-informed decisions to drive the business forward.
• While DPO doesn’t provide a single reference for financial health, a reasonably high DPO shows that the company strikes a realistic balance between paying promptly and making good use of capital.
• Therefore, a higher days payable outstanding (DPO) implies more near-term liquidity, i.e. increased amount of cash on hand.
• Understand the Cash Conversion Cycle (CCC), how to calculate it, and its impact on business.

Importance of DPO for B2B SaaS Startups

As such, analysts often track DPO trends along with other cash flow metrics to assess a company’s liquidity. An uptrend in DPO along with decreasing cash reserves may indicate cash flow issues. Dividing Cost of Goods Sold by the number of days yields the average daily Cost of Goods Sold. Comparing this to the ending AP provides the payables period length. Moreover, some suppliers offer discounts for early payments, which you could miss out on if you take too long to pay. This could make a significant difference in the company’s financial health and growth trajectory.

How is DPO different from Days Sales Outstanding (DSO)?

A firm’s management will instead compare its DPO to the average within its industry to see if it is paying its vendors too quickly or too slowly. In closing, Days Payable Outstanding is a valuable cash flow metric, and this article covered how to calculate, analyze, and improve it, providing a comprehensive understanding of its role in financial accounting. Along with the Days Sales Outstanding (DSO) metric, DPO plays a key role in the cash conversion cycle, which measures how long cash is tied up in working capital before converting back to cash flow. The length of DPO directly relates to a company’s accounts QuickBooks payable policies and relationships with suppliers. An upward trend in DPO may indicate suppliers are willing to tolerate slower payments, while a declining DPO suggests suppliers are shortening payment terms.

For instance, a DPO of 40 days might not work for a supplier who only gives credit terms of 30 days. So, maintaining the delicate balance between cash inflow and outflow is critical to the company’s success in SaaS accounting. This allows you to look at an industry average and see how a company measures up to the broader industry.

In another version, the average value of beginning AP and ending AP is taken, and the resulting figure represents the DPO value during that particular period. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.