Understanding DPO

DPO measures the average number of days a company takes to pay suppliers during a given period. It is calculated by dividing average accounts payable by cost of goods sold (COGS) and multiplying the result by the number of days in the period:

Average Accounts Payable ÷ Cost of Goods Sold × Number of Days

Average accounts payable is calculated by adding the AP balances at the beginning and end of the period and dividing by two. COGS represents the direct cost of producing the goods or services sold during the same period. Service organizations without traditional inventory often substitute the cost of revenue or comparable operating costs that are tied to third-party spending. The measurement period is typically 30, 90 or 365 days.

DPO is one component of the cash conversion cycle:

DSO + DIO – DPO = Cash Conversion Cycle

DSO measures how long it takes to collect payment from customers, while DIO measures how long inventory remains before being sold. (See the AFP Payments Guide: Reducing DSO for Better Cash Flow for more on DSO’s role in the CCC.) Because DPO is subtracted from the equation, extending payment terms generally shortens the cash conversion cycle, allowing businesses to retain cash longer and potentially reduce financing needs. But this does not mean that every company should pursue the highest possible DPO; rather, payment decisions should support both liquidity and long-term supplier relationships.

WHAT IS A "GOOD" DPO?

There is no universal benchmark for DPO. The appropriate level depends on industry, company size, bargaining power, supplier relationships and economic conditions.

According to the American Productivity & Quality Center (APQC), the median DPO across industries is approximately 40 days. Top-quartile organizations average about 50 days, while bottom-quartile companies average roughly 30 days.

Industry differences are significant. Manufacturers often operate with DPOs of 60 to 90 days because they purchase large quantities of raw materials under long-term contracts. Retailers typically fall between 30 and 45 days to maintain dependable inventory flow. Service organizations generally have shorter DPOs because they purchase relatively few physical goods, while technology companies often land between those extremes, depending on whether they sell hardware or software.