Financial Statement Analysis

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**Days payable outstanding**is an important concept if you’re running a business or following a business as an investor. It is also one of the significant parts of cash conversion cycle. Days payable outstanding helps measures the time a business takes to pay off its creditors.

In this article, we will discuss days payable outstanding in detail and why it is one of the most significant concepts in the case of a business.

Let’s get started.

## What is Days Payable Outstanding (DPO)?

Days payable outstanding helps measures the time a business takes to pay off its creditors. Let us have a look at the graph above. We note that Colgate’s Days Payable Oustanding has been stable over the years and is currently at 67.24 days. However, when we compare this with Procter and Gamble, we note that P&G’s Days Payable Oustanding has been increasing continuously since 2009 and is currently very high at 106.64 days.

We will first look at the formula of Days Payable Oustanding DPO and then we will interpret the meaning of this ratio.

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**Days Payable Oustanding Formula**

Here’s the formula –

**Days Payable Outstanding (DPO) Formula = Accounts Payable / (Cost of Sales / Number of Days)**

**Interpretation**

Days payable outstanding is a great measure of how much time a company takes to pay off its vendors and suppliers.

If you look at the formula, you would see that DPO is calculated through dividing the total (ending or average) accounts payable by the money paid per day (or per quarter or per month).

For example, if a company has a DPO of 40 days that means the company takes around 40 days to pay off its suppliers or vendors on average.

Also, you can have a look at this detailed guide to Accounts Payable

We will now look at a practical example to illustrate this.

**Days Payable Oustanding Example**

**Company Xomic has a reputation of paying its vendors quickly. It has an ending accounts payable of $30,000. Its cost of sales is $365,000. Find out the days payable outstanding for Company Xomic.**

This is a simple example. All we need to do is to feed the data into the formula.

Here’s the formula –

Days Payable Outstanding (DPO) Formula = Ending Accounts Payable / (Cost of Sales / Number of Days)

Or, Days Payable Outstanding = $30,000 / ($365,000 / 365) = $30,000 / $1000 = 30 days.

Only computing the Days Payable Outstanding of the company isn’t enough; we need to look at it holistically as well.

We will look at the holistic interpretation in the next section.

### How should a company look at their payables outstanding?

For a company to succeed, it should look holistically.

By calculating the days payable outstanding, a company may get how much time it takes to pay off its suppliers and vendors.

But that alone won’t do any good until the company does few things.

- Firstly, the company should look at the industry and the average days payable outstanding of the industry.
- Secondly, if the company’s days payable outstanding is less than the average days payable outstanding of the industry; then the company may consider increasing its days payable outstanding. But the organization should remember that doing this doesn’t cost them the vendor or any favourable benefits from the suppliers. Keeping these two things in mind, if a company can match up with its Days Payable Outstanding with the average Days Payable Outstanding of the industry; the company would be able to use the cash flow for better use for long period of time.
- Thirdly, if the company’s days payable outstanding is more than the average days payable outstanding of the industry; then the company may consider decreasing its days payable outstanding. Doing this will allow them to satisfy the vendors and the vendors would also be able to provide the company a favourable terms and conditions.
- Fourthly, the company should also look at the similar companies and how they’re approaching the Days Payable Outstanding. If the company notices closely, they would be able to see the consequences of their approach. And then the company can get a better idea about whether to increase the Days Payable Outstanding or to decrease the Days Payable Outstanding.
- Finally, along with DPO, the company also should look at other two factors of the cash conversion cycle. They are days inventory outstanding (DIO) and days sales outstanding (DSO). Since all three are required to form the cash conversion cycle; it’s important that the company pays heed to all three. It will give them a holistic view and they would be able to improve their efficiency in the long run.

### How does the whole process works?

Understanding the whole process of Days Payable Outstanding will definitely help understanding it in detail.

A company needs to purchase raw materials (inventory) from the vendors or the suppliers.

These raw materials can be sourced in two ways. First, the company can buy the raw materials in cash. And another way to purchase the raw materials is on credit.

If a company is purchasing the raw materials in bulk, then the supplier/vendor allows the company to buy on credit and pay off the money at a later date.

The difference between the time they purchase from the supplier and the day they make the payment to the supplier is called DPO.

Now, whatever we explained above is a simplification of DPO. In a real scenario, the things are much complex and the company needs to deal with multiple vendors/suppliers.

Depending on how much time the company takes to pay off the due, the supplier offers many benefits for early payment like the discount on a bulk order or reducing the amount of pay etc.

### Sector Examples of Days Payable Oustanding

#### Example – Airlines Sector

Below is the payable outstanding days of Airlines Sector.

Name | Market Cap ($ billion) | Days Payables Outstanding |

American Airlines Group | 24,614 | 35.64 |

Alaska Air Group | 9,006 | 14.86 |

Azul | 7,283 | 71.19 |

China Eastern Airlines | 9,528 | 47.23 |

Copa Holdings | 5,788 | 30.49 |

Delta Air Lines | 39,748 | 60.12 |

Gol Intelligent Airlines | 21,975 | 58.62 |

JetBlue Airways | 6,923 | 38.72 |

LATAM Airlines Group | 8,459 | 60.48 |

Southwest Airlines | 39,116 | 59.36 |

Ryanair Holdings | 25,195 | 26.79 |

United Continental Holdings | 19,088 | 57.42 |

China Southern Airlines | 9,882 | 13.30 |

- Airline companies have varied payment terms that is reflected in their payment outstanding days.
- China Southern Airlines has the lowest payment outstanding days of 13.30, whereas, that of LATAM Airlines is the highest amount this group at 60.48 days.

#### Example of Automobile Sector

Below is the list of payable days outstanding of top companies in Automobile Sector.

Name | Market Cap ($ billion) | Days Payables Outstanding |

Ford Motor | 50,409 | 0.00 |

Fiat Chrysler Automobiles | 35,441 | 86.58 |

General Motors | 60,353 | 64.15 |

Honda Motor Co | 60,978 | 37.26 |

Ferrari | 25,887 | 124.38 |

Toyota Motor | 186,374 | 52.93 |

Tesla | 55,647 | 81.85 |

Tata Motors | 22,107 | 134.66 |

- We observe varied payment terms and payable days outstanding ranging from 0.00 days to 134.66 days
- Ford Payable days oustanding is at 0 days and that of Tata Motors is at 134.66 days.

#### Example of Discount Stores

Below is the payable days outstanding of top Discount Stores.

Name | Market Cap ($ billion) | Days Payables Outstanding |

Burlington Stores | 8,049 | 70.29 |

Costco Wholesale | 82,712 | 27.87 |

Dollar General | 25,011 | 36.19 |

Dollar Tree Stores | 25,884 | 30.26 |

Target | 34,821 | 55.11 |

Wal-Mart Stores | 292,683 | 40.53 |

- Wal-Mart Stores has Payable days outstanding of 40.53 days, whereas, that of Burlington Stores is highest in this group at 70.29 days.

#### Example of Oil & Gas Sector

Below is the payable days outstanding of top companies in Oil & Gas E&P sector.

Name | Market Cap ($ billion) | Days Payables Outstanding |

ConocoPhillips | 62,980 | 100.03 |

CNOOC | 62,243 | 104.27 |

EOG Resources | 58,649 | 320.10 |

Occidental Petroleum | 54,256 | 251.84 |

Canadian Natural | 41,130 | 30.08 |

Pioneer Natural Resources | 27,260 | 120.03 |

Anadarko Petroleum | 27,024 | 312.87 |

Continental Resources | 18,141 | 567.83 |

Apache | 15,333 | 137.22 |

Hess | 13,778 | 54.73 |

- Overall, the payment days are higher than other sector ranging from two months to nineteen months.
- Continental Resources has a payable outstanding day of nineteen months, whereas that of Canadian Natural is of one month.

### How is cash conversion cycle calculated?

To understand the perspective of DPO, it’s also important to understand how the cash conversion cycle is calculated.

First of all, the company needs to calculate three things.

The company first needs to calculate DIO (Days Inventory Outstanding) by following the formula below –

DIO = Inventory / Cost of Sales * 365

Then, the company calculates the DSO (Days Sales Outstanding) by using the formula –

DSO = Accounts Receivable / Total Credit Sales * 365

Finally, the company computes DPO (Days Payable Outstanding) by the formula we mentioned above –

DPO = Accounts Payable / (Cost of Sales / 365)

Finally, the DIO and DSO need to be added and then the DPO needs to be deducted from the sum.

This is how the cash conversion cycle is calculated.

In a nutshell, the DIO tells a company how much time it takes to transfer the inventory into sales. DSO tells about how much time the company takes to collect the money from the debtors. And DPO tells about how much time the company takes to pay off the money to its creditors.

That means, if we look at all three, whole cycle of business is complete – from inventory to cash collection.

### Additional Resources

This was the guide to Days Payable Oustanding, Days Payable Outstanding Formula, and its examples. You may also have a look at the below articles learn further –

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