What is days payable outstanding (DPO)?
Days payable outstanding, or DPO, is a metric used to assess how long a company takes to settle its debts with suppliers. It involves dividing the total payable amount by the average daily cost of goods sold. A higher DPO signifies that a company is delaying its payments to suppliers, potentially indicating financial difficulties. DPO is employed by investors and analysts to evaluate a company's liquidity and credit risk.
How do you calculate days payable outstanding (DPO)?
To compute DPO, first, determine the company's average payable period, which is found by dividing the total number of days taken to pay bills by the number of days in the period. Multiply the result by 365 to obtain the average number of days. To calculate DPO, simply subtract the average payable period from the current date.
What should you be cautious of when calculating days payable outstanding (DPO)?
When calculating DPO, it's essential to be aware of accruals, which are expenses incurred but not yet paid. For instance, if a company pays its employees on the last day of the month for work done since the beginning of the month, it must account for the accrued wages. This would result in a higher DPO compared to paying employees on the first day of the month.
Additionally, when calculating DPO for companies with seasonal employees, such as those hired for the holiday season, variations in DPO may arise as accrued wages must be considered.
For companies with substantial long-term debt, DPO can be affected. Companies with high long-term debt would have a lower DPO when paying suppliers within 30 days compared to paying within 60 days because they need to consider the 30-day payment requirement for suppliers but not for lenders.
What's the distinction between days payable outstanding and days sales outstanding (DSO)?
Days payable outstanding (DPO) measures the average number of days a company takes to settle its supplier payments, while days sales outstanding (DSO) measures the average number of days a company requires to collect payments from customers.
A high DPO may suggest that a company is delaying payments to suppliers, indicating potential financial difficulties. In contrast, a high DSO indicates challenges in collecting payments from customers, also potentially signaling financial issues.
Could you provide an example of days payable outstanding (DPO)?
Certainly, an example of days payable outstanding (DPO) would be a company with an average accounts payable balance of $10,000 and an average daily sales of $1,000. In this case, the DPO would be 10 days.