Key takeaways
- Days Payable Outstanding (DPO) measures how long a company takes to pay supplier invoices.
- Days Sales Outstanding (DSO) measures how long it takes to collect payments from customers after a sale.
- Effective cash management means extending DPO—holding cash longer before paying suppliers—and reducing DSO—collecting from customers faster.
- Beyond reducing dependence on external financing, effective DPO and DSO management can strengthen supplier and customer relationships.
Managing working capital effectively starts with understanding how cash moves through your business. Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO) provide valuable insights into your company's financial operations and are predictive of future cash flows. By implementing effective cash flow management strategies that improve these metrics, your business can maintain liquidity, ensure smooth operations and strengthen relationships with suppliers and customers.
What is Days Payable Outstanding (DPO)?
Days Payable Outstanding (DPO) is a financial metric that measures the average number of days a company takes to process and pay supplier invoices. A higher DPO means the business retains cash longer before paying suppliers, which can improve working capital and increase financial flexibility.
How to calculate DPO
To calculate DPO, follow these steps:
Gather these three numbers:
- Total accounts payable (AP) at the end of the period: the amount your business owes to suppliers
- Cost of goods sold (COGS) for the period: the direct costs attributable to the production of the goods your business has sold
- Number of days in the period: typically 365 for annual calculations (some industries use 360), 90 for quarterly or 30 for monthly
Use this formula: DPO = Accounts Payable ÷ Cost of Goods Sold × Days
How DPO affects cash flow and supplier relationships
A higher DPO indicates your business is taking longer to pay suppliers. Extended payment timelines improve liquidity and provide more flexibility in managing other financial obligations. An easy way to do this is to pay invoices on their due dates—not earlier—to preserve cash without straining supplier relationships.
A lower DPO signals your company may be paying its suppliers too quickly. While this might strengthen supplier relationships, it can inhibit effective cash management. Understanding DPO helps your business assess and optimize payment practices and tools. This knowledge enables you to balance efficient cash flow management with healthy supplier relationships.
While optimizing DPO and DSO metrics is financially beneficial, successful businesses balance these goals with maintaining strong relationships. The aim isn't to delay all payments and accelerate all collections, but rather to manage cash flow in alignment with your business values and your customer and supplier expectations. Companies with strong supply chains often negotiate transparent payment terms that benefit both parties rather than simply extending payments unilaterally.
Our team can help you develop strategies for cash flow management and working capital that work best for your business.
What is Days Sales Outstanding (DSO)?
Days Sales Outstanding (DSO) measures how quickly your business converts credit-driven receivables into cash. While optimal DSO varies across industries, a lower number indicates more effective collection practices. These processes—such as prompt invoicing, clear payment terms and efficient follow-up—strengthen cash flow and reduce accounts receivable (AR) aging, which may result from customer cash flow issues.
In general, a DSO of 30 days or less is considered standard for most B2B trade, indicating that cash is being collected at an efficient rate and can be redeployed into the business.
DSO also reflects the efficiency of your cash application process—how accurately and quickly your organization matches received payments to specific invoices and posts them to your accounting system.
For example, if customers pay within 30 days but it takes 10 days to post those payments to the accounting system, DSO is effectively extended—working against the goal of reducing it. Posting receivables is a crucial step in the order-to-cash cycle for maintaining accurate financial records.
How to calculate DSO
To calculate DSO, follow these steps:
Gather three numbers:
- Total accounts receivable (AR) at period end: what customers owe you
- Net credit sales for the period, excluding any cash sales
- Number of days in the period: typically 365 for annual calculations (some industries use 360), 90 for quarterly, 30 for monthly
Use this formula: DSO = Accounts Receivable ÷ Credit Sales × Days to DSO = accounts receivable ÷ credit sales
Strategies to extend DPO and improve working capital
- Negotiate favorable payment terms with suppliers: For example, request extended payment periods without penalties.
- Request early-payment discounts: This reduces bottom-line costs while improving supplier relations.
- Implement efficient AP processes, including AP automation: This helps ensure timely and accurate payments.
- Monitor AP aging carefully: Tracking payment timing helps avoid settling invoices before they're due.
Strategies to reduce DSO and accelerate collections
- Invoice and bill customers electronically: Digital billing reduces costs while increasing efficiency, accuracy and security, and starts the clock on payment terms sooner.
- Invoice immediately after delivering goods or services: Payment terms don't begin until the customer receives the invoice.
- Implement effective credit policies: Extend credit only to creditworthy customers to reduce AR aging risk.
- Monitor AR aging carefully: Consider accepting card payments from customers with high AR aging before pursuing collection.
- Automate AR with technology: Automation improves AR efficiency and accuracy across your accounts receivable management process.
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JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
