Days Payable Outstanding - DPO

One of the keys to creating happy positive cash flow for a given business lies in negotiating favorable payment terms which delay the payment due for things the business needs to...run. Things like their raw materials, manufacturing, and other inventory elements...so that there is a longer period between that due date and when receipt of funds from goods sold is logged.

The longer the carry time, the more advantages the entrepreneur has to use their precious capital for other creative purposes. The Days Payable Outstanding is a ratio calculated by dividing the Accounts Payable by the Cost of Goods sold over a fiscal quarter (90 days) or a fiscal year (365 days). Companies with an unusually long DPO, like Amazon, take over 2 months on average to remit payment to 3rd party vendors. Why do they take so long? Because they can. This delay allows Amazon to able to leverage its cash position for a multitude of other concessions on shipping fees, drop off storage, and other key factors in its supply chain.

Think: Prime Drones.

Related or Semi-related Video

Finance: What is Days Sales Outstanding?29 Views

00:00

finance a la shmoop- what is days sales outstanding? okay so this isn't a

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congratulatory missive, like hey you have a lot of sales today [men in suits smile]

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outstanding! no it's nothing like. that day sales outstanding or dsos is a

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balance sheet computation that puts in perspective how well or rather how

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quickly you are collecting the bills you are owed for stuff you have sold. like

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let's say your company pulp friction is selling paper pulp to the newspaper [paper truck]

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industry. gradually week after week month after month quarter after quarter your

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DSOs are creeping upward from the thirty eight days to now fifty three days in

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the course of a few years. well what's going on here

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well if the newspaper industry were financially healthy it would be [doctor examines office building]

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reasonable that they would want to pay their bills on time, but clearly there is

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a trend here. another year goes by and DSOs are now at sixty four days. this is

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a problem people the industry is paying for the pulpit consumes to print on

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paper at a slower rate than they did before. well why well the newspaper [chart shown]

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industry is slowly going broke and they're trying to conserve as much cash

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as they can, by leaning on their vendors to essentially finance them so that they

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you know die more slowly. key takeaway DSOs are a relative number that is in a [equation]

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vacuum, if you just look at one number as a representation of DSOs it doesn't

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really mean anything. dsos have to be taken in context of the

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history of the company itself and in context of whatever the industry average

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is. like maybe the average DSO of a pulp maker is highly seasonal, and each year at [man smiles with sunshine and rain]

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ebbs and flows with the weather. or maybe your particular pulp company was way

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better than the norms and it's just normalizing as DSOs creep back up to the

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industry standard of 64 days. context. alright so the calculation. how do you

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calculate DSO? well it's this just accounts receivable divided by sales [equation]

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made on credit. and if you're inside of a large corporation you can assume that

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all sales are made on credit. it's not like a McDonald's Store where a USA

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Today or The Wall Street Journal walks in hands [ drive through window]

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warehouser the pulp company 14 million dollars in cash for 7,000 tons of pulp.

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think about the equation. its volatile. and it can turn into a quote good

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unquote number quickly by having your pulp [man eats dinner]

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selling business turned sour. like nobody buys from you for a long time and

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everyone pays their bill .well all of a sudden you have a DSO number of like [dump truck knocks man over]

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five, because nobody owes you money in the form of your account receivable. not

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a good situation either again DSOs need context. a huge DSO number can be just

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fine as well all of the sudden China Russia and all [world map]

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of Latin America buy your pulp. you suddenly have a billion dollars in

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accounts receivable and it'll take you months and months and months to fulfill

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those orders. so your dsos then balloon up and look

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bad, well most companies would kill to have this quote bad unquote DSO number. [man is mugged]

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so that's it DSOs are just a relative index of how well you are collecting

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your bills. receivables over sales that's it. outstanding work [equations]

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