Right way to calculate DPO

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Q: How do most companies calculate DPO on a monthly and yearly basis? At my company, we calculate DPO based on the next three months expected COGS X 4 divided by the current months accounts payable balance. This gives up AP turnover. We then take 360 days divided by the AP turnover to get DPO. Each month, we update our expected average DPO by taking expected CY COGS divided by a 13-point average payable balance.

A: There is not a definitive answer to your question. You can calculate DPO in a variety of ways and get slightly different answers. The key is to be consistent with the calculation and make sure it fits your business model. Some companies use the last 3 three months of expenses and calculate the annual DPO. This calculation is often used by rapidly growing companies who business metrics change often. Other companies will use a trailing twelve months calculation when the company has a steady slower growth rate.

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