Days Payable Outstanding (DPO)

What is days payable outstanding (DPO)?

At a high level, DPO helps you understand how you're managing your working capital and vendor relationships. This can have pretty important implications for a company, particularly in terms of cash flow. 

However, those impacts differ based on a variety of factors, including whether or not you carry inventory and when your revenue is recognized relative to when you have to pay your vendors. Let’s take a closer look here, at how DPO can impact cash flow for different types of businesses and other reasons it’s an important metric to track. 

Why DPO matters

Working capital efficiency

Cash inflow delays can strain your working capital. By strategically managing outflows, you can better align expenses with revenue and optimize your DPO to maintain operational liquidity. For instance, if your customer payment terms average 30 days but your DPO is 60, you're effectively using supplier credit.

DPO can be particularly important for SaaS businesses where customer acquisition costs (CAC) are high, and revenue from new deals takes time to materialize. A good DPO strategy syncs payments with incoming revenue to help finance teams avoid shortfalls or overdrafts.

Cash conversion cycle impact

A longer DPO helps to shorten the cash conversion cycle (CCC), which measures how long it takes a business to convert its investments into cash. 

The impact of DPO on the CCC is really more important for inventory-based businesses than it is for SaaS and service-based businesses. This is because the CCC focuses on the conversion of inventory to cash. And since SaaS and service-based businesses don’t carry inventory, the metric has little meaning. 

However, the impact of a longer DPO for an inventory-based business can be powerful. For example, retailers often have a lot of cash tied up in their inventories. The more of that inventory they can sell before they have to pay their suppliers, the more working capital they will have to invest in additional inventory, staff up for holiday season sales, and continue to pay the rent and other fixed operational expenses during slower periods. 

Risk mitigation

SaaS companies are particularly prone to cash flow issues due to spikes in churn, enterprise contract delays, seasonal fluctuations, or late payments. A flexible DPO strategy is beneficial during lean periods, as it ensures continuity and protects supplier relationships. This can help reduce the need to rely on emergency credit or cut down operations if payments or renewals are delayed.

Inventory-based businesses are vulnerable to seasonal fluctuations in sales and economic downturns, losses due to inventory obsolescence and theft, and supply chain issues. Optimizing their DPO can help preserve cash to weather these difficulties and invest in other risk mitigation initiatives, like better inventory management systems and diversifying their suppliers.   

Investment opportunity

Optimizing DPO allows businesses to keep cash in the business longer—cash that SaaS companies can invest in growth initiatives, such as product innovation, geographic expansion, or other high-ROI areas. 

Instead of raising equity or debt to scale, founders can negotiate longer payment windows to support growth. However, SaaS leaders must maintain clear communication with vendors to ensure feasibility.

The relative impact of this type of “short-term financing” for creating opportunity is magnified for inventory-based businesses where negotiating longer payment terms of 90-120 is not uncommon.   

Operational process benchmark 

DPO shows the maturity of your procurement and accounts payable processes. Manual reconciliation or approval delays can cause DPO to stagnate or fluctuate. An improving DPO indicates that your finance team is streamlining invoice processing, negotiating better terms, or using automation. 

Inventory-based business can leverage this to build trust with new suppliers. Similarly, for SaaS businesses, a low DPO can signal strong financial leadership to potential investors.  

DPO, when combined with other key metrics like days sales outstanding (DSO), shows your negotiation capabilities and operational efficiency. Investors often look for high or improving DPO, which indicates strong financial management and vendor relationships.

How to calculate DPO?

Approaches to calculating DPO vary by industry based on cost structures and cash flow. In this section, we provide two basic approaches, the standard DPO formula and an alternative approach that can be used instead of or alongside the 

The standard DPO formula

The standard formula below is what most inventory-based businesses, such as  manufacturing and retail, use to calculate their DPO: 

This formula can be used to calculate DPO for any period. You would use average accounts payable (AP) for the period and divide it by the cost of goods sold (COGS) during the same period and multiply the result by the number of days in the period. 

Here’s how to calculate the average AP for the period:

Alternative approach: Purchase-based calculation

The standard DPO formula works well for most inventory-based businesses but it can be problematic for service-based businesses and SaaS companies. This is because the COGS for these and other “inventory-light” businesses doesn’t capture the full range of expenses reflected in their accounts payable. 

Unlike businesses where inventory comprises a significant amount of their accounts payable, for service-based businesses, accounts payable includes expenses for intangible things like subcontractor fees, travel expenses, and software licenses. All of these are tracked in accounts payable but may not be treated as part of their COGS. 

Similarly, the COGS for SaaS businesses includes expenses related specifically to the delivery of their services but misses significant operating expenses, such as sales and marketing expenses.     

Using a purchased-based approach solves these problems by basing the DPO calculation on purchase activity to provide a more accurate representation of DPO. 

Here’s how to calculate it: 

Step 1. Calculate the average AP for the period 

Note that the formula is the same one you would use with the standard DPO formula above:

Step 2. Use the average AP to calculate the AP turnover ratio

In the formula for accounts payable turnover ratio, the net credit purchases includes all purchases made on credit during the period.

Step 3. Use the AP turnover ratio to calculate your DPO

An example using both methods

In this example, we’ll calculate the DPO for a SaaS company using each method, starting with the standard DPO formula. 

Here’s the data we have to work with for Q1 of 2025 (90 days): 

• Beginning AP: $120,000
• Ending AP: $180,000
• COGS (aka cost of revenue): $450,000
• Total credit purchases: $600,000

First, we’ll calculate the average AP:

Plugging the average AP into the standard DPO formula, we get a DPO of 30 days: 

Now, using the purchase-based DPO method, we’ll start by calculating the AP turnover, using our average AP value from above:

This gives us an AP turnover of 4, which we can then use to calculate the DPO with the purchase-based formula:

Let’s take a closer look at the difference in these results: 

• DPO based on cost of revenue is 30 days: Shows how long it takes to pay for expenses related to delivery of services to its customers, which for a SaaS company, includes hosting costs, third-party software licenses, customer success expenses, and direct support costs. 
• Purchase-based DPO is 22.5 days: Shows how long it takes to pay for all purchases made on credit, which for a SaaS company often includes significant marketing expenses that don't fall under COGS. 

For SaaS companies, using a purchase-based method provides a clearer, more accurate picture of how quickly they’re paying their vendors, which is important for managing cash flow and vendor relationships. 

What does your DPO mean?

Determining an ideal DPO is complex, as it depends on factors like market conditions and industry specifics.

Understanding low DPO

A low DPO means your company pays suppliers faster than the industry standard of 30-60 days. On the surface, a low DPO suggests strong cash management and good will. However, at a granular level, it may also indicate limited negotiation with vendors or missed opportunities to optimize cash flow.

Early payment discounts may seem beneficial, but holding cash longer can have its advantages, too, especially for SaaS businesses as it can lead to faster cash burn and reduce working capital which is critical for growth. 

Traditional, inventory-based businesses have different strategies for improving DPO, such as leveraging their purchase power to negotiate more favorable payment terms. SaaS and service-based businesses can leverage their history of on-time payments and growing spend.  

Considering the implications DPO has on cash flow, it makes a lot of sense for most businesses to pay invoices when they’re due and not before. 

Understanding high DPO

A high DPO of 60 days or more can reflect smart cash flow management, like holding cash to fuel growth or strong vendor negotiations. However, it can also signal cash flow issues, where payments are delayed out of necessity.

It's important to distinguish between strategic optimization and reactive delays to use DPO effectively. A high DPO can strain supplier relationships and disrupt operations if mismanaged. Vendors may grow frustrated with delayed payments and may consider imposing late fees or tighter payment terms. 

Investors may consider aggressive DPO strategies as signals of financial distress, so you must balance cash preservation with vendor goodwill. Using DPO strategically lets you reinvest cash quickly during rapid growth phases, seasonal dips, and high-ROI opportunities.