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 |
x |
Days in accounting period |
|
Credit Purchases |
||||
Or
|
Days Payables Outstanding |
= |
Average Creditors |
x |
Days in accounting period |
|
Total Purchases |
||||
Or
|
Days Payables Outstanding |
= |
Average Creditors |
x |
Days 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 1
Extracts from the financial statement of HIJ PLC for the year ended 30 June 20X5 are as follows:
| 30 June 20X5 | 30 June 20X4 | |
|---|---|---|
|
|
$ |
$ |
|
Current Liabilities |
||
|
Bank Overdraft |
25,000 |
22,000 |
|
Trade Payables |
80,000 |
60,000 |
|
Other Payables |
50,000 |
25,000 |
|
|
||
|
Cost of Sales |
1,500,000 |
1,200,000 |
Calculate Days Sales Outstanding for the year ended 30 June 20X5.
|
Days Payables Outstanding |
= |
(80,000 + 60,000) / 2 |
x |
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.
Example 2
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 period |
9,000,000 |
5,000,000 |
||
|
Closing inventory- Raw Materials |
(1,000,000) |
- |
||
|
Raw-Materials Consumed |
8,000,000 |
7,000,000 |
||
|
|
||||
|
Salaries, wages and benefits |
10,000,000 |
9,000,000 |
||
|
Factory rent |
1,100,000 |
1,000,000 |
||
|
Repair and maintenance |
400,000 |
500,000 |
||
|
Depreciation |
2,000,000 |
1,500,000 |
||
|
Cost of production |
22,500,000 |
19,000,000 |
||
|
|
||||
|
Opening Inventory - finished goods |
3,500,000 |
2,500,000 |
||
|
Closing Inventory - finished goods |
(2,000,000) |
(3,500,000) |
||
|
|
24,000,000 |
18,000,000 |
||
| As at 30 June 2015 | As at 1 April 2015 | |
|---|---|---|
|
|
$ |
$ |
|
Trade and other payables |
||
|
Trade payables |
600,000 |
500,000 |
|
Advance from customers |
400,000 |
300,000 |
|
Other Payables |
20,000 |
40,000 |
|
|
1,020,000 |
1,040,000 |
Solution:
|
Average trade payable |
= |
$600,000 + $500,000 |
= |
$550,000 |
|
2 |
||||
|
Credit Purchases |
= |
$ 9,000,000 |
Number of days = 91
|
Days Payables Outstanding |
= |
$550,000 |
x |
91 |
|
$9,000,000 |
||||
Days payables Outstanding = 5.56 days
Notes
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).