Days Payables Outstanding

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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   =

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

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.

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.

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.

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	=	$
		Submit