what does dpo tell you 
generally a company acquires inventory utilities and other necessary services on credit it results in accounts payable ap a key accounting entry that represents a company s obligation to pay off the short term liabilities to its creditors or suppliers beyond the actual dollar amount to be paid the timing of the payments from the date of receiving the bill till the cash actually going out of the company s account also becomes an important aspect of the business dpo attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time additionally a company may need to balance its outflow tenure with that of the inflow imagine if a company allows a 90 day period for its customers to pay for the goods they purchase but has only a 30 day window to pay its suppliers and vendors this mismatch will result in the company being prone to cash crunch frequently companies must strike a delicate balance with dpo companies having high dpo can use the available cash for short term investments and to increase their working capital and free cash flow fcf however higher values of dpo may not always be a positive for the business if the company takes too long to pay its creditors it risks jeopardizing its relations with the suppliers and creditors who may refuse to offer the trade credit in the future or may offer it on terms that may be less favorable to the company the company may also be losing out on any discounts on timely payments if available and it may be paying more than necessary on the other hand a low dpo indicates that a company is paying its bills to suppliers quickly which may suggest that the company is managing its cash flow effectively a low dpo is considered to be a positive sign for a company s financial health as it shows that the company is able to pay its bills in a timely manner this also helps maintain good relationship with suppliers however a low dpo may also indicate that the company is not taking advantage of discounts offered by suppliers for early payment for example a company may be extended a payment period of 30 days if it usually pays invoices after 10 days the company could have been earning interest on the funds for an additional 20 days before remitting payment a high dpo can indicate a company that is using capital resourcefully but it can also show that the company is struggling to pay its creditors special considerationstypical dpo values vary widely across different industry sectors and it is not worthwhile comparing these values across different sector companies a firm s management will instead compare its dpo to the average within its industry to see if it is paying its vendors too quickly or too slowly depending upon the various global and local factors like the overall performance of the economy region and sector plus any applicable seasonal impacts the dpo value of a particular company can vary significantly from year to year company to company and industry to industry dpo value also forms an integral part of the formula used for calculating the cash conversion cycle ccc another key metric that expresses the length of time that a company takes to convert the resource inputs into realized cash flows from sales while dpo focuses on the current outstanding payable by the business the superset ccc follows the entire cash time cycle as the cash is first converted into inventory expenses and accounts payable through to sales and accounts receivable and then back into cash in hand when received 