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 | 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?
Example
Extracts from the financial statement of HIJ PLC for the year ended 30 June 20X5 are as follow:
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.
DPO = | (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.
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 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 |
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 | = | $ |