WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Investment Banking Tutorials » Financial Statement Analysis » Days Payable Outstanding

Days Payable Outstanding

What is Days Payable Outstanding (DPO)?

Days payable outstanding help measures the average time in days that a business takes to pay off its creditors and is usually compared with the average payment cycle of the industry to gauge whether the payment policy of the company is aggressive or conservative.

Let us have a look at the graph above. We note that Colgate’s DPO 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 DPO has been increasing continuously since 2009 and is currently very high at 106.64 days.

Days Payable Outstanding

Days Payable Outstanding  Formula

Here’s the formula –

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

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 by 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 Outstanding Example

Example #1

Company Xomic has a reputation for paying its vendors quickly. It has an ending account 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 –

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

Or, DPO = $30,000 / ($365,000 / 365) = $30,000 / $1000 = 30 days.

Only calculating the DPO of the company isn’t enough; we need to look at it holistically as well.

Example #2

Let us take the example of a company whose accounts payable for the quarter are $100,000. The value of inventories at the beginning of the quarter is $250,000, total purchases made during the quarter $1,000,000, out of which cash purchases are of $700,000, and inventories of $100,000 remain unsold at the end of the quarter. Then for the calculation of Days payable outstanding for the quarter, the following steps are to be taken.

Solution:

Use the given data for the calculation of DPO.

Example 2

Now, First, we have to start with the calculation of the cost of goods sold (COGS) by using the following formula:

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Days Payable Outstanding Formula Example 2.1

COGS = 250,000 + 1,000,000 – 100,000

COGS = $ 1,150,000

Now, DPO for the quarter can be calculated by using the above formula as,

Example 2.2.0

DPO = $100,000 * 90 days / $1,150,000

DPO will be –

Days Payable Outstanding Formula Example 2.3

DPO = 8 days (Approximately)

Note:

It must be noted that while calculating COGS in this example, cash purchase is not considered as to whether the purchase is made in cash or on credit; it must be included while calculating COGS.

Example #3

Let us take another example where the company whose accounts payable for the quarter April to June are $100,000, and for the quarter July to September are $500,000 and the cost of goods sold for the quarter April to June is $450,000, and for the quarter July to September is $500,000, then for calculation of days payable outstanding the following steps are to be taken.

Solution:

Given Data for Quarter April to June:

Example 3

Now, DPO for the quarter can be calculated by using the above formula as,

Example 3.1.0

DPO = $100000 * 90 days / $450000

DPO will be –

Example 3.2

DPO = 20 days.

Similarly,

Given Data for Quarter July to September:

Days Payable Outstanding Formula Example 3.3

Now, DPO for the quarter can be calculated by using the above formula as,

Example 3.4.0

DPO = $500000 * 90 days / $500000

DPO will be –

Days Payable Outstanding Formula Example 3.5

DPO = 90 days

Therefore, from the above-given example, it is amply clear that in the period April to June, the company is paying its creditors in 20 days but in the period July to September, the company has increased its days payable outstanding to 90 days.

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

How to Interpret DPO?

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 DPO in the industry.
  • Secondly, if the company’s DPO is less than the average DPO 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 favorable benefits from the suppliers. Keeping these two things in mind, if a company can match up with its DPO with the average DPO of the industry, the company would be able to use the cash flow for better use for a long period of time.
  • Thirdly, if the company’s DPO is more than the average DPO of the industry, then the company may consider decreasing its DPO. Doing this will allow them to satisfy the vendors, and the vendors would also be able to provide the company with favorable terms and conditions.
  • Fourthly, the company should also look at 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 or decrease the DPO.
  • Finally, along with DPO, the company also should look at the other two factors of the cash conversion cycle. They are days of inventory outstanding (DIO) and 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 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, 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 bulk order or reducing the amount of pay, etc.

Sector Examples of Days Payable Outstanding

Example – Airlines Sector

Name Market Cap ($ billion) DPO
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 are 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

Name Market Cap ($ billion) DPO
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 Outstanding is at 0 days, and that of Tata Motors is at 134.66 days.

Example of Discount Stores

Name Market Cap ($ billion) DPO
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

Name Market Cap ($ billion) DPO
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 in other sectors 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 the 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 by following the formula below –

cash conversion cycle is calculated

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 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, the whole cycle of a business is complete – from inventory to cash collection.

Days Payable Outstanding Video

Additional Resources

This article was the guide to Days Payable Outstanding. Here we discuss the formula to calculate Days Payable Outstanding, its interpretation along with practical industry examples. You may also have a look at the below articles learn further –

  • Compare – Issued vs. Outstanding Shares
  • Days Sales Outstanding Formula
  • Salary Payable
  • Days Sales Uncollected
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Ratio Analysis Course

Step by Step Guide to Calculating Financial Ratios in excel

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More