Key Insight
High DPO means a business is using its suppliers as an interest-free lender. That's good for cash flow — until the supplier relationship breaks down or payment terms get tightened post-close.
The Formula
DPO = (Accounts Payable ÷ COGS) × Number of Days in Period
For a business with $90,000 in AP and $1.8M in annual COGS: DPO = ($90,000 ÷ $1,800,000) × 365 = 18.25 days
This means the business pays suppliers an average of 18 days after receiving goods or services.
Why DPO Matters for Acquisitions
Working capital baseline: High DPO reduces working capital requirements — payables fund operations in the gap before receivables come in. If DPO drops post-close (because the new owner doesn't have the same supplier relationships or leverage), working capital requirements increase.
Supplier relationship signal: Very high DPO can indicate strained supplier relationships — paying slowly because the business lacks liquidity, not because it has negotiated favorable terms. Outstanding overdue payables may be a hidden liability.
Working capital adjustments: In purchase price negotiations, the target working capital level will reflect typical AP balances. A sudden change in DPO just before closing can manipulate the working capital peg.
DPO vs. DSO
The cash conversion cycle compares both:
- High DSO + Low DPO = bad (collecting slowly, paying quickly — cash-strapped)
- Low DSO + High DPO = good (collecting quickly, paying slowly — cash-rich)
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