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Days Payable Outstanding Explained
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Days payable outstanding (DPO) is the average number of days it takes a company to pay its suppliers. DPO is calculated by dividing 365 by payables turnover, where payables turnover is total credit purchases from suppliers divided by the average accounts payable (A/P).
DPO = 365/(Payables Turnover) = 365/((Total Credit Purchases)/(Average A/P))
Some people calculate DPO using total purchases. But if cash purchases make up a significant portion of total purchases, then using total purchases (instead of total credit purchases) will distort DPO. However, if the proportion of purchases that are cash purchases is fairly stable over time, this limitation isn’t that critical when analyzing trends in DPO.
Unfortunately, many companies don’t disclose their total purchases (credit or otherwise) from suppliers. In such cases, you can attempt to estimate total purchases or simply use cost of goods sold (COGS) instead of total purchases when calculating DPO. Here’s the formula for calculating DPO using COGS:
DPO = 365/(Payables Turnover) = 365/((Cost of Goods Sold)/(Average A/P))
Accounts payable is usually related to COGS so it’s common to use COGS when calculating DPO. However, you can’t always use COGS to calculate DPO because service providers (e.g., law firms, consulting firms) don’t have COGS.
Note that DPO is inversely related to payables turnover.
• A high DPO means low payables turnover
• A low DPO means high payables turnover
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DPO = 365/(Payables Turnover) = 365/((Total Credit Purchases)/(Average A/P))
Some people calculate DPO using total purchases. But if cash purchases make up a significant portion of total purchases, then using total purchases (instead of total credit purchases) will distort DPO. However, if the proportion of purchases that are cash purchases is fairly stable over time, this limitation isn’t that critical when analyzing trends in DPO.
Unfortunately, many companies don’t disclose their total purchases (credit or otherwise) from suppliers. In such cases, you can attempt to estimate total purchases or simply use cost of goods sold (COGS) instead of total purchases when calculating DPO. Here’s the formula for calculating DPO using COGS:
DPO = 365/(Payables Turnover) = 365/((Cost of Goods Sold)/(Average A/P))
Accounts payable is usually related to COGS so it’s common to use COGS when calculating DPO. However, you can’t always use COGS to calculate DPO because service providers (e.g., law firms, consulting firms) don’t have COGS.
Note that DPO is inversely related to payables turnover.
• A high DPO means low payables turnover
• A low DPO means high payables turnover
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
—
SUPPORT EDSPIRA ON PATREON
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
—
LISTEN TO THE SCHEME PODCAST
—
GET TAX TIPS ON TIKTOK
—
ACCESS INDEX OF VIDEOS
—
CONNECT WITH EDSPIRA
—
CONNECT WITH MICHAEL
—
ABOUT EDSPIRA AND ITS CREATOR
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