Days Payables Outstanding


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.

Formula

Days Payables Outstanding   =

Average Creditors xDays in accounting period
Credit Purchases

Or

Days Payables Outstanding   =

Average CreditorsxDays in accounting period
Total Purchases

Or

Days Payables Outstanding   =

Average CreditorsxDays in accounting period
Cost of sales

Where:


  • Average Creditors represent the average of trade creditors balances at the start and end of the accounting period.

    i.e. Average Creditors = (Opening Creditors + Closing Creditors) ÷ 2

Which formula should be used to calculate Days Payables Outstanding?

Ideally, DPO should be calculated based on credit purchases. This makes sense because credit purchases directly influence the amount of trade payables which in turn can be used to determine payable days.



However, as the amount of credit purchases is usually not disclosed in the public financial statements, external users may calculate DPO by replacing credit purchases with total purchases or cost of sales (see example below).



Therefore, subject to the availability of information, DPO should be calculated using the above formulas in the order of preference presented above (i.e. First calculate DPO using the credit purchases. If the amount of credit purchases is not known, calculate DPO using total purchases and if total purchases are also not known, then calculate DPO using cost of sales).

Example

Extracts from the financial statement of HIJ PLC for the year ended 30 June 20X5 are as follow:

30 June 20X530 June 20X4
$$
Current Liabilities
Bank Overdraft25,00022,000
Trade Payables80,00060,000
Other Payables50,00025,000
Cost of Sales1,500,0001,200,000

Calculate Days Sales Outstanding for the year ended 30 June 20X5.

DPO = (80,000 + 60,000) / 2x 365
1,500,000

=   17.03 days

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:

  • It has been offered better credit terms than its competitors (e.g. due to its greater market dominance); or
  • It is unable to pay its suppliers on time (e.g. due to poor liquidity).

A business having DPO lower than the industry average would suggest either:

  • It has been offered a lesser credit period than its competitors (e.g. due to its inferior credit rating); or
  • It is not utilizing the full extent of credit period offered by suppliers; or
  • It is paying suppliers early in order to avail early payment discount.

MCQ

Test Your Understanding

Following information has been extracted from the quarterly management accounts of ABC PLC:


Quarter ended
30 June 2015
$
Quarter ended
30 June 2014
$
Cost of sales
Opening Inventory - Raw Materials-2,000,000
Purchases during the period9,000,0005,000,000
Closing inventory- Raw Materials(1,000,000)-
Raw-Materials Consumed8,000,0007,000,000
Salaries, wages and benefits10,000,0009,000,000
Factory rent1,100,0001,000,000
Repair and maintenance400,000500,000
Depreciation2,000,0001,500,000
Cost of production22,500,00019,000,000
Opening Inventory - finished goods3,500,0002,500,000
Closing Inventory - finished goods(2,000,000)(3,500,000)
24,000,00018,000,000

As at
30 June 2015
$
As at
1 April 2015
$
Trade and other payables
Trade payables600,000500,000
Advance from customers400,000300,000
Other payables20,00040,000
1,020,0001,040,000

Insert the amounts to be used in the calculation of Days Payables Outstanding for the quarter ended 30 June 2015 below.


Average Trade Payables=  +  $ 
2
Credit Purchases=
Number of days=