Days Payable Outstanding Definition
Days Payable Outstanding Definition – “A measure indicating how long it takes, on average, for a company to pay its payable. “.
In simple words, this ratio identifies the number of days the company takes to pay its suppliers. The lower Days payable outstanding indicates that the management is appropriately managing the working capital. In addition to this, it also indicates that company is paying off it suppliers early as well as availing the discounts for the early payments.
Similarly, a higher Days Payable outstanding (DPO) indicates that company is taking time in paying their vendors. However, even if company has good liquidity position and company is making payment on the date of payment due. This is shortening the conversion cycle. Ultimately leads to good management of working capital.
DPO = Number of days in a period/Payables turnover for the period
= Purchases/ Average trade payables
= (Number of days in a period/ Purchases)× Average Trade Payables
Days Payable Outstanding for Year = (365/Annual Purchases ) × Average Trade Payables
Here, Purchases = Cost of goods sold + Closing Inventory – Opening Inventory
Days Payable Outstanding Example
In order to get a clear idea about Days Payable Outstanding Definition, let’s discuss an example.
Here are the following items in the financial statement of company ABC and XYZ
|Particulars||Company ABC||Company XYZ|
|Inventory at the end of year||–||60,000|
|Cost of goods sold||–||5,00,000|
|Purchases made during the period||3,00,000||–|
|Accounts payable on 1 April 2017||1,50,000||1,50,000|
|Accounts Payable on 31 March 2017||3,00,000||3,00,000|
Purchases of XYZ = 5,00,000 + 60,000 – 1,00,000
Average Accounts payable for ABC company = (1,50,000 + 3,00,000)/2
DPO (ABC) = (365 / 3,00,000) × 2,25,000
DPO (XYZ) = (365/ 4,60,000) × 2,25,000
Importance of Days Payable Outstanding
This ratio is very important from the perspective of both company and its stakeholders. It helps the company in knowing their liquidity position as well as the operational efficiency of the business. At the same time, creditors need it for monitoring whether they will get their money back or not.