Days Payable Outstanding Definition – Formula

functions of financial management

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.

Formula

DPO = Number of days in a period/Payables turnover for the period

Or

= Purchases/ Average trade payables

Or

= (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
Beginning inventory1,00,000
Inventory at the end of year60,000
Cost of goods sold5,00,000
Purchases made during the period3,00,000
Accounts receivable60,000
Accounts payable on 1 April 20171,50,0001,50,000
Accounts Payable on 31 March 20173,00,0003,00,000
Current Ratio2.000.50
Quick Ratio1.000.30

Purchases of XYZ = 5,00,000 + 60,000 – 1,00,000

= 4,60,000

Average Accounts payable for ABC company = (1,50,000 + 3,00,000)/2

= 2,25,000

DPO (ABC) = (365 / 3,00,000) × 2,25,000

= 273

DPO (XYZ) = (365/ 4,60,000) × 2,25,000

= 178

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.

Related Financial Terms of Days Payable Outstanding

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