Days Payable Outstanding (DPO): Formula, Examples & Calculation

Cody Cromwell
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What Days Payable Outstanding Is

How to Calculate Days Payable Outstanding

Days Payable Outstanding (DPO) is a very valuable finance term and a calculation can be affected by the fair value of the company’s stock. As a result, DPO is one of the most commonly used FAS 141 calculation in the financial analysis of companies. The formula used for DPO is as under:

DPO = Current Dividends Payments / Current Shares Outstanding

It’s important to know that Cash Flow and Dividend Payout Ratio can have a huge effect on the DPO calculation. Obviously, the more dividends received by a company from its operating activities, the more days it will take to pay for its shares.

As a result, you may see up to 5% different Days Payable Outstanding when calculating the DPO for different companies.

There’s a slight difference between Days Payable Outstanding and Percent of Days Payable, but in this case, there’s none. The dividend accounting is done differently for both, and the formula for calculating Percent of Days Payable will not be considered here.

Furthermore, Percent of Days Payable > 100% means that the company is paying more for its shares than disposing them.

Also note that the company’s Dividends Payout Ratio can also affect the determination of DPO.

Identify Inventory Purchased

When you have to report inventory in your books, inventories are different from accounts payable: inventory includes inventory purchased from a vendor or vendor only. This includes inventory on consignment, which is also included in inventory and paid for but not owned by the company.

To identify inventory, first you need to determine what part of the transaction was invoiced to you. If inventory is invoiced to a cost center, you can identify it by the inventory number in the invoice. If the inventory was purchased from a vendor, it will show up as a credit in your purchase order accounts payable, along with an invoice number. Or when you order inventory, your purchasing agent may call it a vendor exception, by which the vendor is limited to a certain amount of inventory, and you order more to cover the amount above the limit.

If the inventory is invoiced to an account for your product and sold to a sub-account, then the inventory is identified based on the account number on the invoice. If it’s on consignment, you will need to add the consignment number to identify the inventory.

Calculate Cost of Goods Sold

Cost of goods sold (COGS) is one of the key financial measures. It’s a term that has its place in almost every budgeting process. COGS is a term that refers to the total cost that you charged the customer for the goods that they purchased from you.

Your shopkeeper, if you are running your own business, is likely to have a number of customers in the past and, there are chances that you will be paid later. So, it’s necessary that you promptly submit it to your banker.

Typically, a term called COGS is used to arrive at the breakeven point that helps calculate when you start making profits. Once you know your break even point or if you are able to make returns, you can work on your profitability.

Calculate Average Accounts Payable

Calculate Days Payable Outstanding

Days Payable Outstanding (DPO) is simply the number of days in a payment period that remain to be paid against outstanding receivables.

The days payable outstanding are calculated on the basis of the starting balance and the periodic payments made.

Theoretically, it can be calculated as follows.

Formula to calculate the Days Payable Outstanding
All you need to do is to divide the periodic payments paid by the number of days in the period.

Alternative Formulas for Days Payable Outstanding

(DPO)

What is the Days Payable Outstanding (DPO) formula?

—…-

Number of Days from Net Purchase Price

—…-

You can find more information on Days Payable Outstanding in this previous post.

How is days payable outstanding related to cash conversion cycle?

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How to Interpret Days Payable Outstanding

The days payable outstanding (DPO) is essentially a big number that represents the days left until a company needs to pay its invoices. This number doesn’t impact the amount of income the company generates, as it’s simply a measurement of when the company needs to send out the checks.

The number of days left is determined by adding the balance of the DPO-in light of the current accounts receivables to the number of days left before the next payment period.

This number of days is then transformed using the formula below into a percentage:

Days DPO (%) = [(Payment Period – Start of Month) / 30] x 100

DPO examples:

If a company pays its invoices between the 25th and the 31st of the month at the standard invoice discount of 35%, then the DPO for that month will be the difference between two numbers:

(35% x (31 – 25)) / 30 = 36

DPO = exponents on both sides, then multiply the two and divide by the number of days in a month:

36 * 30 / 31 = 84.673%

The percentage tells you how many days are left until the company pays the invoices (85 of the last 89).

How to Determine Your Optimal DPO

A longer payables calendar makes it harder for you to control a cycle of receivables and payables. When the payment cycle is too short, you’ll have to immediately collect any receivables or payables without sustainably benefiting the business, as you’ll be doing it just to get paid. On the other hand, when the payment cycle is too long, you’ll have to wait to collect and pay too much accrued revenue, thus, making it harder for you to control the cycle.

This is why the DPO plays an important role in determining which option and mix of receivables and payables is the most beneficial.

In short, it’s all about balancing the payments and collections….

The DPO should be long enough to pay or collect all receivables within your desired budget range but short enough to avoid hurting the cash-flow and paying more than you earned. Or said differently, the DPO will help you responsibly manage your cash-flow and profit.

If you’re confused about how to best manage your payments and collections, you’ll find this quick post useful.

Days Payable Outstanding Examples

Usually in the business world, one has to apply for bank loans to get money. The money lenders are looking for fast money lenders who pay up instantly. One such lender is UAE, who offer instant cash loans in almost every corner of the world. In London, as an example, such a lender is UKFast MoneyLender.

A typical money lender will give a loan of 5000 pounds which will be paid back in 24 months. Many people will take this kind of loan even if they are already paying back a separate loan from a different lender. People should be more cautious about how they spend their money. However, if someone can’t repay a loan, they can ask their friends and family for a loan. They will easily be in a position of repaying the loan in the future.

In this article, I will show you how to calculate the DPO for a new loan when someone already has a promissory note to pay back another loan.

For example, DPO will work as follows:

First, I will calculate the DPO of the new loan:

Days Payable Outstanding = New Number of Days to Repay loan / First Number of Days to Repay old loan.

Days Payable Outstanding at ABC Company

Days Payable Outstanding at XYZ Company

Days Payable Outstanding at XYZ Company is a figure that’s reported by a business every month to show its financial position. This figure is, in its simplest terms, the total amount of debt that the business has agreed to repay within a month.

So, if the business is undertaken a loan to the tune of X m. it has to pay back the sum in X days, plus an additional amount of interest due.

The debt is payable every month – hence the name … the company has to repay the balance amount every month.

In calculating a monthly figure, this is the amount of debt that is expected to be repaid in one month.

In all other cases, DPO is used to calculate long-term figures of a company that are then used to see long-term financial strategies, annual accounts and so on.

In general, DPO from a company is the sum of loans extended or received by that company in one month.

There could be up to 5 categories of DPO:

  • Current liabilities and advances
  • Available-for-sale investment securities
  • Property, plant & equipment
  • Other receivables
  • Contractual obligations under long-term leases

To calculate DPO, we first need to know the category of the DPO.

Reports You Need to Compute Your Days Payable Outstanding

Accounting is a dynamic field that changes with the advancement of technology. Thus many organizations today use the ERP systems to manage their day to day accounting tasks.

In this post, we will discuss days payable outstanding. Now days payable outstanding is the maximum number of days remaining on the amount that a customer owes the company. DPO calculation plays a very important role in understanding the financial status of a firm. If the calculation accurately reflects the true performance of the company, the company is booming and if its is going down it reflects bad news for the company.

There are several reports/tools available from which you can find out the future trend of your company’s operations. Majority of these reports are available in QuickBooks – the pre-eminent accounting software.

Following are some of the reports available in QuickBooks:

Day’s sales outstanding and Days Sales Outstanding are two reports that expose the cash flow to the supplier and the customers respectively. (read more here)

Accounts receivable aging report gives you a general idea of how many days worth of sales the unpaid invoices need to turn into accounts receivable.

Days Payable Outstanding report gives you a general idea of how many days worth of payments are left to come in to pay off the invoices.

How to Generate a Profit and Loss Report in Quick B ooks Online

(QB)

In Quick Books, you can quickly generate a Profit and Loss Report by clicking File > Reports > Profit and Loss > Profit & Loss. You can then use this Profit and Loss report as a required report or export it to a viewable format.

The Profit and Loss report gives you an account-by-account view of your business expenses, opening inventory and sales, income, and expenses and closing inventory. It allows you to generate a report with your current accounting period and another with your previous accounting period. This is useful if you want to look at a report from a specific time period or compare two different times.

In the report, you can track specific expenses by category or by account. For tracking expenses by category, simply fill in the list box labeled Expense Categories. For tracking expenses by account, simply fill in the list box labeled Expense Accounts. There are also categories for opening inventory and closing inventory, which you can fill in if you are either managing your inventory or running your business on a cash basis.

How to Generate a Vendor Balance Summary Report in Quick B ooks Online

Third party accounting software such as QuickBooks Online has enhanced the accounting experience by connecting to accounting software such as Intuit QuickBooks, the premier accounting software in the world.

Now you can bank all your financial transactions in a central location, analyze and analyze those transactions, even personalize the dashboard to view only the transactions and reports of interest to you. Entering the date and remaining balance in the report will generate an Excel file that you can save for printing, analysis and exporting to accounting software.

This third party software in combination with QuickBooks Online opens a whole new world of access, control and possibilities to the QuickBooks user who wants a well thought out, easy to understand, easy to use yet versatile inventory management solution.

To generate a vendor balance summary report in QuickBooks Online:

Navigate to Vendor List >> Vendors >> Enter a Companyname or a Vendor ID >> Edit >> Vendors >> Click on the Report arrows >> click on the Report button >> Vendor Balance Summary.

The report will be displayed on your dashboard on the right side after the report is generated.

Days Payable Outstanding Calculation for the Sample Company

Note: This post assumes that the company issues a 30 Days DPO (Days Payable Outstanding) policy and payments are made on the 20th of each month.

If we go back to part 1 of this tutorial series, you will remember that this company has a Late Payment policy of up to 30 days. To determine DPO, we subtract the number of days in the policy from the number of days in the month. Since there are 30 days in February, DPO will be equal to 30-30 = 0.

If DPO falls on a weekend, the calculation will be postponed to the first business day after the weekend. For the above example, it would be April 1st since there’s a weekend on Feb 28th.

Special Calculation for Zero Day Policy

As you probably know, some companies will allow customers to make payment on the day the invoice is presented. For companies that have this policy, we simply take the number of days in the policy and use that as DPO.

Using the same sample company, if they have a policy allowing payments up to 30 days, 30-0= 30.

Customize DPO For Your Purpose

DPO is one of the most critical components in any type of financing analysis. It is also an important element measures repayment capacity of a debtor. Here is further information about the Days Payable Outstanding formula and how to use it.

Adjust the length of time period

By which period revenue (annual) should be discounted in order to arrive at outstandings at the end of that period.

DPO is used for the accumulated amortization or accumulated depreciation method of accounting (MACRS).

Adjusted for period interest:

DPO = R – (P/2π)

If DPO is negative, deduct from it a debt discount to arrive at a net amount receivable at the end of the period.

Adjusted for period interest and periods out:

DPO = R – (P/2π) – (M/2π)

Example: The interest rate is 4% effective rate of interest

Assume: Firm has expected to open one plant per year for 8 years.

What would be the DPO?

Solution:

Period revenue (AR) = Annual revenue (AR) / 12

R = 360.000 / (2*π) = 240.000 / (2*3.14)

Period interest rate is: 4%

P = 8.000 / 240.000 = 0.24

Adjust the Calculation of Average Accounts Payable

The calculation of Days Payable Outstanding (DPO) is very important to know. The formula is divided into two parts. The first part of the calculation will give us the term outstandings, it is the time period which is used by the company to pay for the past purchases from the creditors as well as the revenues, to record all their obligations for the current time period. Meanwhile you will get the actual amount that is been paid to creditors, which is a very good business way to calculate how long you would pay your debts.

You are expected to make sure that the calculation of days payable outstanding is done correctly. The most accurate formula to calculate the days payable outstanding using the following steps may be:

(Accounts receivable DPO: Accounts payable DPO)/365

(Comparing to other exceptions, Days Payable Outstanding (DPO) would be a long term expense, and the formula is divided into two parts. The first part of the calculation will give us the term outstandings, it is the time period which is used by the company to pay for the past purchases from the creditors as well as the revenues, to record all their obligations for the current time period. Meanwhile you will get the actual amount that is been paid to creditors, which is a very good business way to calculate how long you would pay your debts.

Compare DPO across suppliers

Each supplier has a different cost to collect from a customer. Having your supplier calculate DPO on an average basis give you a better comparison. In the event that you are looking to do business with an unknown supplier, using their DPO on the AS2 forms can help indicate the risk and provide you with a ballpark figure of what your DPO may be.

Data from November 2012 to January 2013.

Average DPO of a company: 46 Days
Source: Rypline AS1 to AS2 data based on companies moving 21 MBs to Rypline’s AS2 service during this period.

Average DPO of a company: 31 Days
Source: Rypline AS2 Charts December 2012 data based on AS2 data from November 2012 to December 2012.

Calculate for Operating Payable and Expenses

The Days Payable Outstanding (DPO) is the total number of days that a business would be able to defer its financial obligations to other parties (suppliers, vendors, lenders, contractors, and so on) if it were to attempt to do so.

Here are some examples to generally demonstrate how Days Payable Outstanding is calculated and applied:

If you plan to go on vacation for a week with your family,

Then,.

(number of days required to pay supplier B) ÷ number of days you plan to be

Away (5 days) = Days Payable Outstanding – You have 5 days to pay off what you owe to supplier B.

If you received a contract to build a house,

Then,.

(number of days required to pay contractors A and B) ÷ number of days it is expected you would be on site (10 days) = Days Payable Outstanding – You have 10 days to pay off what you owe contractors A and B.

If you inherit a company with debt outstanding,

Then,.

(number of days required to pay suppliers, vendors, lenders, and contractors) ÷ number of days the company was run (5 years) = Days Payable Outstanding – You have 5 years to pay off what you owe to your suppliers, vendors, lenders, and contractors.

Pros and Cons of Using Days Payable Outstanding

(DPO)

Inventory Turnover is an important metric to optimize for the best performance of a company and its functions. However, many times it is not easy to understand what exactly is the inventory turnover that most accurately represents the Inventory Turnover of the company.

There are several ways to understand the Inventory Turnover: Days Payable Outstanding, Days Sales Outstanding are two of the more important inventory turnover metrics.

Considering the relative nature of Days Payable Outstanding (DPO), the inventory turnover based on Days Payable Outstanding is the ideal inventory turnover.

Understanding Days Payable Outstanding

The days Payable Outstanding expressed on working days.

Days Payable Outstanding is calculated by the following calculation:

χ(P – P*) + χ(O – O*) = DPO

Where χ is the days Payable Outstanding, P is the days Purchases and O is the days Sales.

Days Payable Outstanding can be the amount of days payable account receivable or outstand.

Days Payable Outstanding gives the number of days for which invoices should be paid.

The number of days Payable Outstanding is an important inventory turnover metric for manufacturers and manufacturers.

The inventory turnover on the basis of Days Payable Outstanding is the most sold inventory turnover.

Pros of Days Payable Outstanding

Apart from providing update on days payable outstanding (DPO), DPO also suggests how fast customers pay their accounts. This is because for some customers, cash flow is an issue and for that the organizations would have to look into the DPO. But as we find out, DPO is a nasty term that companies avoid for long because it represents the time that the company or business owes from the time of invoice until the cash is received. This is not known to many until an account receivable audit is done that would be expecting to see the DPO of the company.

This is the prevalent word in the business world because of its importance and is being enforced by ACCA and other accountancy bodies. Some of the advantages of working with DPO are as follows:

Though DPO is not known to many, the importance of it is so much that an accountancy audit is being done to see how well the company/business is maintaining it.

Days payable outstanding (DPO) is a metric that is being encouraged by the accountancy bodies and should be considered by situation to see how far ahead the company is managing its DPO.

It is also vital for the new entrants in the market to improve their DPO so that it could boost their growth.

Being a market leader or not, everything depends on how well you maintain your DPO in comparison to other companies because ultimately this is what would be noted by the customer.

Cons of Days Payable Outstanding

(DPO): Floating Interest Rate

Often businesses use Days Payable Outstanding (DPO) as one of their payment terms. Because of this, there's a certain level of risk that comes along with this formula. The most obvious risk is floating interest rates. An interest rate that varies over time is a higher risk as it can weaken the value of your DPO number. The quantity of interest rate risk is directly affected by the number of days in the desired payment term. DPO 6 is the most prone for floating interest rates.

Another risk is how hard it would be to fully pay off the loan by the due date. Certain conditions would have to be met in order for this to happen, and these conditions could be more difficult than expected. For example, late fees and default interest would have to be paid. Late fees could come along with high interest rates, too.

An other way to harm your business's credit is by a low line of credit. A small line may not be strong enough, and it may be hard to raise the amount. So, a primary goal of a low line of credit could be to eliminate it altogether.

Frequently Asked Questions (FAQs) About Days Payable Outstanding

How do you calculate days payable outstanding?

What is DPO?

Day Payable Outstanding (DPO) is the number of days US exporters will be held liable if they go into default on their debt.

What does high payable days mean?

When analyzing the financial status of a company, the most important figure is the amount of days payable outstanding (DPO). It provides an indicator of a company’s level of liquidity or its solvency.

A company that has a higher DPO is more likely to default on its loan payments. There are other factors that could lead to the company defaulting on its loan payments, but DPO helps put the situation in perspective.

When analyzing the financial status of a company, you should always take a closer look at the DPO. High DPO typically indicates that a company is facing significant liquidity problems.

Surprisingly, setting out the formula for calculating DPO can be difficult. The formula for calculating DPO needs to consider the payment terms, terms to maturity, and interest rate of the loan.

The term to maturity denotes the period before you start to recover your principal amount. Terms to maturity can be in the form of zeroed terms to maturity if the company is refinancing or the loans are being paid off early.

As for the interest rate, it’s a component of the loan repayment formula. If the loan has fixed or variable interest rate, the formula needs to consider it.

The payment terms and rate of interest can combine to create different calculations for DPO. Let’s take a look at some of the common formulas for DPO.

How can I increase my payable days?

If an account is turned towards red you can usually increase the days payable outstanding (DPO) by adding credit. This is done by paying your outstanding credit card bill and making a purchase on it. When you or your business makes a large amount of payments towards the card, you can urge the card company to be more lenient with the time to pay it off.

The card company will usually release payments to customers as soon as possible. They may increase the number of paydays allowed you to pay, for example adding one or two extra paydays. This is usually done if you show you have some kind of financial hardship that is preventing you from paying off the card debt.

It is also possible to increase the DPO by transferring a Debt/Credit Balance from a zero charge card onto a charge card that has a DPO on the charge card.

A debt balance transfer can add a few days to the DPO. This occurs because the card issuer does not know whether the new cardholder will pay off the debt balance using their new card. Therefore, the credit line is given a higher risk profile.

You can also increase your credit limit. This can add a few days to the DPO. The pre-approval from the bank can indicate that you have more financial means than you actually display. This can be enough for the card issuer to increase the credit limit.

Bottom Line

Guide To Days Payable Outstanding (DPO):

A company’s DPO is the number of days past the due date on which the unpaid receivables are still outstanding. It is an important accounting metric because it impacts the company’s liquidity position and consequently the interest that it will pay on the unpaid bills.

Days Available for Sale

Since DPO is used in analyzing the interest bearing debt, it is primarily used in evaluating the current interest cost that will be paid for a given pool of unpaid receivables. It can also be used in evaluating the cash flows that may accompany the sales of the receivables to another party.

Days Turnover

The DPO calculation can be used to determine information about the receivables turnover. Companies that have a higher turnover of receivables can expect to have a higher interest expenses.