Days Payables Outstanding
|1. Definition||2. Formula||3. Example|
|4. Interpretation||5. Analysis||6. MCQ|
|Definition||Days Payables Outstanding (DPO) is the average number of days that a business takes to pay its trade creditors.
DPO is also known as Creditor Days, Payable Days & Average Payment Period.
Days Payables Outstanding =
Which formula should be used to calculate Days Payables Outstanding?
|Example||Extracts from the financial statement of HIJ PLC for the year ended 30 June 20X5 are as follow:
|Interpretation||Days Payables Outstanding indicates how long a business takes to pay for its credit purchases.
Using the above example, for instance, we can conclude that HIJ PLC paid its trade creditors after an average period of 17 days from its credit purchases.
|Analysis||Monitoring payables is a significant part of the working capital management. Businesses should analyze DPO to ensure balance between liquidity and profitability.
DPO affects the short term liquidity of business because the longer a business takes to pay its suppliers, more cash that will be available to finance its investments and operations.
However, frequent and excessive delays in payments can harm the relationship with key suppliers which could negatively impact the profitability of business in the long term. Delaying payment to suppliers may also affect the short term profitability of businesses due to loss of early payment discounts.
Businesses usually have a DPO of between 30 and 60 days although it can vary significantly from industry to industry.
A business having DPO higher than the industry average would suggest either:
A business having DPO lower than the industry average would suggest either:
Test Your Understanding
Following information has been extracted from the quarterly management accounts of ABC PLC:
DPO calculation of ABC PLC should be based on raw material purchases. Other production costs (e.g. depreciation, salaries, etc.) shall be ignored as they do not relate to trade payables.
Similarly, all payable balances other than trade payables (e.g. advance from customers) shall be ignored in DPO calculation.
Number of days should be calculated from the start of the accounting period (i.e. 1 April 2015) until the period end (i.e. 30 June 2015).