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

The amount of average days from when a corporation acquires goods and supplies until the supplier is paid is measured by days payable outstanding (DPO). Average accounts payable is divided by the yearly cost of goods sold times 365 days in the DPO calculation. A greater DPO suggests that the corporation is paying its suppliers later than expected.

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What Is the Number of Days Payable Outstanding?

The number of days payable outstanding is a measurement of how long it takes a corporation to pay its suppliers. A high DPO indicates a problem paying suppliers, while a low DPO indicates inadequate financial management. Due to the importance of paying bills on time, a suitable DPO should be somewhat less than the usual payment terms supplied by suppliers.

The formula for calculating days payable outstanding is as follows:

Annual Cost of Goods Sold / Average Accounts Payable X 365 Days

For durations other than one year, the DPO formula may readily be adjusted. The formula is valid as long as the multiplier’s number of days matches the number of days used to calculate the cost of goods sold. More information on this and other options to tweak the DPO calculation may be found in the next section.

How to Calculate Outstanding Days Payable

To compute days payable outstanding, you’ll need your current and preceding year’s balance sheets, as well as a total purchases report. These reports may be used to track inventory purchases, compute the cost of goods sold, and average accounts payable. Once you have these figures, you may use the procedure to calculate the number of days payable due.

1. Recognize the inventory that was purchased.

Add up all inventory purchases for the period, regardless of whether they were made with cash or credit. You may run a vendor purchases report and choose just the vendors from whom you buy inventory if you use accounting software like QuickBooks. Payments for non-inventory goods such as rent and utilities are not included.

2. Determine the cost of goods sold

The cost of goods sold is the total cost of items sold over the course of a year. To begin, add purchases to starting inventory, which is the same as ending inventory from the previous year, to determine the products available for sale throughout the year.

Goods Available for Sale = Beginning Inventory + Purchases

Second, to calculate the cost of goods sold, deduct ending inventory from products available for sale.

Ending Inventory – Goods Available for Sale = Cost of Goods Sold

Consider the following inventory and purchases at Joe’s Sprocket Supplies:

$10,000 in inventory as of December 31, 2018. $15,000 in inventory as of December 31, 2019. Inventory During the year 2019, $100,000 was spent on a purchase.

The following items are available for purchase in 2019: $10,000 + $100,000 = $110,000

In 2019, the cost of goods sold is $110,000 – $15,000 = $95,000.

You can avoid manually calculating the cost of goods sold if you use an accounting system and run a profit and loss report, which will show you the cost of goods sold for the period. However, this cost of goods sold number is only true if the accounting system’s initial and ending inventories are right.

3. Calculate the average amount of money owed to you.

The average amount owing to suppliers over the course of the year is referred to as accounts payable. When determining days payable outstanding, only consider vendors from whom you acquired merchandise. For example, since utility expenditure is not included in merchandise acquired, don’t include the due to the utility provider.

Adding the starting and ending accounts payable and dividing by two is the most popular way of computing the average:

Avg Accounts Payable = Beginning Accounts Payable + Ending Accounts Payable / 2

Consider the following accounts due for Joe’s Sprocket Supplies:

$6,000 in accounts payable as of December 31, 2018. As of December 31, 2019, accounts payable totaled $10,000.

The following formula is used to determine the average accounts payable:

$6,000 + $10,000 divided by two equals $8,000

4. Determine the number of days payable outstanding.

You’re ready to compute Days Payables Outstanding after you’ve calculated average accounts payable and the cost of goods sold. Average accounts payable divided by the cost of products sold multiplied by 365 days equals days payable outstanding.

Annual Cost of Goods Sold / Average Accounts Payable X 365 Days

Joe’s Sprocket Supplies, for example, has average accounts payable of $8,000 and an annual COGS of $95,000. The outstanding days payable is 30.7 days.

Joe’s Sprocket Supplies’ DPO calculation is as follows:

$8,000 divided by $95,000 is 30.7 days

In the reports you can produce section below, QuickBooks Online users may learn how to run various reports. You must manually compute average accounts payable and the cost of goods sold if you do not utilize accounting software.

5. Alternative Days Payable Outstanding Formulas

Days payable outstanding formulae may be found on a variety of websites and sources. You may be confident that these alternate formulae provide the same results as the method presented in this article. Choose whatever formula is the simplest to memorize or makes the most sense to you.

The following are some frequent approaches that arrive on the same day payable outstanding figure:

Annual Cost of Goods Sold / Average Accounts Payable X 365

Annual Cost of Goods Sold / 365 Average Accounts Payable

How to Interpret Outstanding Days Payable

The number of days payable outstanding indicates how long it takes you to pay your suppliers for inventory and supplies on a regular basis. A low DPO might indicate that the corporation is paying its suppliers ahead of schedule. A high DPO might indicate that the firm is experiencing cash flow issues and is having difficulty paying its suppliers on time.

What is the Best DPO for You?

Compare your DPO to the industry’s normal payment terms. If the majority of your industry’s suppliers accept payment within 30 days (Net30), your ideal DPO should be just under 30 days. If it’s much less, it’s possible you’re paying your suppliers earlier than required or they’re not providing you the industry-standard Net30 payment terms.

Because DPOs differ by sector, comparing yourself to your colleagues might be helpful. Avoid making comparisons to much bigger businesses since they may be able to demand lengthier payment terms than you have.

Outstanding Days Payable Examples

The following examples can help you understand How to Interpret Outstanding Days Payable using two fictitious companies, ABC and XYZ Companies.

At ABC Company, there are days payable that are past due.

The following are the 2019 results for ABC Company, a retailer that buys and sells a range of widgets:

Net30 payment terms were offered by all of ABC Company’s Widget suppliers, which means ABC has 30 days to pay the supplier without suffering late penalties.

For ABC, the average accounts payable is determined as follows: $4,000 Beg AP + $5,000 End AP / 2 = $4,500 Avg AP

ABC’s cost of goods sold is determined as follows: $15,000 initial investment + $150,000 in purchases equals $165,000 total investment. Products on the Market $165,000 in goods for sale – $25,000 in cash $140,000 in total investment Cost of Goods Sold (Cost of Goods Sold)

Days payable outstanding are computed as follows: $4,500 Average Accounts Payable / $4,500 Average Accounts Payable X 365 = 11.7 Days

ABC Company appeared to be paying its widget suppliers much too rapidly. They took fewer than 12 days to pay, despite having been offered 30 days to do so. This is a case of bad monetary management. ABC might have kept its money for another 18 days and put it to better use, such as paying off a credit card or generating interest in a savings account.

At XYZ Company, days payable are past due.

The following are the 2019 results for XYZ Company, a company that buys raw materials to make devices.

The payment conditions for all of XYZ Company’s material suppliers were Net30, which meant that XYZ had 30 days to pay the supplier without incurring any late penalties.

For XYZ, the average accounts payable is determined as follows:

$17,500 Avg AP = $20,000 Beg.AP + $15,000 End AP / 2 = $20,000 Beg.AP + $15,000 End AP

For XYZ, the cost of goods sold is computed as follows:

$10,000 initial investment + $100,000 in purchases equals $110,000 in goods for sale $105,000 Cost of Goods Sold = $110,000 Goods Available for Sale – $5,000 End Inv

The following formula is used to compute the number of days payable outstanding:

Average Accounts Payable: $17,500 / Annual Cost of Goods Sold: $105,000 X 365 = 60.8 Days

The average time it took XYZ Company to pay its suppliers was roughly 61 days. This is more than the 30 days that XYZ’s suppliers allow. XYZ may be experiencing cash flow issues, which are exacerbated by late payment penalties imposed by its vendors. Alternatively, XYZ may be able to get away with 61 days. Because the production process takes time to transform raw resources into cash, the firm may have a protracted operating cycle. Perhaps XYZ will be able to locate suppliers that understand its extended working cycle and can provide Net60 payment terms.

Calculate Your Days Payable Outstanding

You’ll require accounts payable to your suppliers at the end of the current and previous years before you can calculate days payable overdue. It’s worth noting that the starting balances for the current year are the accounts due at the conclusion of the previous year. You’ll also need the cost of products sold in the previous year.

These figures may be seen in the profit and loss report and the vendor balance summary report in QuickBooks.

Make a profit and loss report

To begin, go to the Reports Center.

As displayed, go to the bottom left menu bar and choose Reports:

In QuickBooks Online, go to Reports.

2. Open the Profit and Loss Statement.

Run the Profit and Loss report as described in the Business Overview section:

In QuickBooks Online, go to the Profit and Loss report.

3. Run the report after selecting the reporting period.

Select the appropriate reporting period above the report and click the Run Report button as shown:

In QuickBooks Online, set the reporting period and run the report.

The following report shows the $23,100 cost of products sold for the year:

QuickBooks Online Profit and Loss Report Sample

How can I create a Vendor Balance Summary Report?

To begin, go to the Reports Center.

As displayed, go to the bottom left menu bar and choose Reports:

In QuickBooks Online, go to Reports.

2. Run the Summary of Vendor Balances Report.

Scroll down to the section What you owe and select Vendor Balance Summary, as shown:

In QuickBooks Online, go to Vendor Balance Summary.

3. Make the Report Your Own

In the top right corner of the report, click the gray Customize icon. The latest day of your reporting period should be entered as the reporting period. Select the aging method as the report date from the Aging drop-down box. Place a checkmark next to Vendor in the Filter drop-down menu. Select just the providers from whom you acquire inventory from the Vendor drop-down box, as illustrated below:

In QuickBooks Online, change the date and report options.

4. Generate the Report

The accounts payable to inventory suppliers of $1,100 at the end of 2019 are shown in the report below:

Sample Vendor Balance Summary in QuickBooks Online (Sample 2109 Vendor Balance Summary)

5. Run the same report for Accounts Payable in the Beginning.

By choosing Customize again and adjusting the date to the end of the previous reporting period, you may run another vendor balance summary report for commencing accounts payable. The following report reveals $1,500 in accounts receivable to inventory suppliers at the start of 2019:

In QuickBooks Online, here’s an example of a 2018 vendor balance summary.

Calculation of Days Payable Outstanding for the Sample Company

The following reports supplied by QuickBooks Online may be used to compute the days payable outstanding:

$1,500 start AP + $1,100 finish AP / 2 = $1,300 average AP

$23,100 Annual Cost of Goods Sold X 365 = $1,300 Average Accounts Payable

Accounting software like QuickBooks Online allows you to easily compute a variety of key financial ratios to help you assess your company’s strengths and shortcomings.

DPO may be customized

If a bank or creditor asks for your days payable overdue, you should follow the steps outlined above. However, if you’re evaluating your organization using DPO, don’t be hesitant to tweak it to fit your requirements.

Here are some ideas for customizing your days payable due calculation:

Change the duration of the time period.

By computing the cost of goods sold for the quarter and multiplying by 90 days instead of 365, DPO calculations may be changed to a quarterly measure. It may also be done monthly by multiplying the monthly cost of products sold by the number of days in the month. This might be beneficial if you have a seasonal company and want to observe how DPO changes over the year.

Adjust the Average Accounts Payable Calculation

An average of accounts payable that incorporates the amount throughout the year rather than just the starting and ending balance may be more appropriate for your DPO computation. Use a monthly average by multiplying the monthly sum in accounts payable by 12 to get a monthly average. This is particularly important if the balance at the beginning and end of the year is not very indicative of the overall balance.

Holiday Supplies, Inc.’s Average Accounts Payable

Holiday Supplies, Inc. is a holiday supply store. Because it purchases a big portion of its yearly inventory in the first week of December, its accounts payable at the end of the year are much greater than the rest of the year.

The accounts payable balance for Holiday Supplies, Inc. at the end of each month is shown below.

$12,000 Start AP + $15,000 Finish AP / 2c = $13,500 Average AP

Using a monthly average, the average accounts payable for Holiday Supplies, Inc. is:

$2,000+$500+$700+ $300+ $500+ $700+ $2,500+ $1,200+ $800+2,000+ $7,000+ Avg AP = $15,000 / 12 = $2,767

Because of Holiday Supplies, Inc.’s seasonal nature, the average accounts payable and DPO are inflated by just considering the beginning and ending amounts in the average. The balances at the start and end of the year do not reflect the balance throughout the year.

Compare DPOs from different vendors.

Only accounts payables and cost of goods sold from that supplier may be used to compute DPO for that supplier. Calculating DPO by supplier might help you figure out whether you’re getting the most out of a given supplier’s payment terms. In other words, it may identify a supplier that requires payment within 30 days, but you pay them in 14 days on average.

Calculate the amount of operating payables and expenses.

The typical DPO described above is only appropriate for inventory purchases. You may change it to look at different payables if you like. For administrative expenditures like utilities, phone, and internet, you may wish to compute days payable outstanding. In that instance, the accounts payable to include are the sums owing at the beginning and end of the year to all of your utility, telephone, and internet suppliers. The costs include all of your utility, phone, and internet bills from the previous year.

When it comes to DPO calculations, you have a lot of leeways. You’ll have a substantial DPO if you utilize the same suppliers for payables and costs.

The Benefits and Drawbacks of Using Days Payable Outstanding

Advantages of Outstanding Days Payable

The advantages of employing days payable outstanding are as follows:

• Easy to compare to payment terms: Because the DPO is mentioned in days, it’s simple to compare it to popular payment terms (such as Net30) to see whether you’re getting the most out of the payment terms.
• Can compare to industry peers: You can detect whether your DPO is obtaining better payment terms from its suppliers by comparing it to similar-sized firms in your sector. Annual financial statements are required to be disclosed by publicly listed firms, and they normally create an annual report that is accessible on their website. Other firms’ data is more difficult to get by, but your industry organization may have some industry averages for you to use in your comparisons.

Cons of Outstanding Days Payable

The disadvantages of employing days payable outstanding are as follows:

• Difficult to identify ideal value: A lower value isn’t necessarily preferable since it might indicate that your organization is paying suppliers too soon and not using flexible payment periods.
• Doesn’t provide you with any information about specific suppliers: The DPO is an average that does not indicate if you are paying all of your vendors on time. You should review your accounts payable aging report on a regular basis to see how you’re doing with specific suppliers.
• It’s difficult to compare to other organizations since their size and industry have a significant influence on their DPOs. Expecting your small firm to have the same DPO as a large corporation that may demand extended payment periods is usually unrealistic.

It’s simple to grasp days payable outstanding since it’s just the average number of days it takes you to pay your suppliers. It’s a bit more difficult to determine if your DPO is optimum. The best way to utilize DPO is to compare it to similar-sized industry peers or to conventional payment terms in your sector.

Frequently Asked Questions (FAQs)

How can you figure out how many days are owed to you?

Average accounts payable divided by yearly cost of goods sold multiplied by 365 equals days payable outstanding. The average accounts payable is normally computed by dividing the starting and ending accounts payable by two.

What does it imply to have a lot of payable days?

High payable days indicate that the firm has been able to negotiate favorable payment terms with suppliers (such as Net60), or that the company is experiencing cash flow problems and is unable to pay suppliers on time. Lower payable days aren’t necessarily a good thing since it might indicate that the firm is paying its suppliers earlier than required.

What can I do to increase the number of days I have to pay?

You may extend payment days by paying suppliers on or around their due dates, but not earlier. Negotiate improved payment arrangements to extend payable days even more. If you agree to keep a specific level of business, a supplier could raise your payment terms from Net15 to Net30.

Conclusion

Reports with outstanding days payable how long does it take to pay vendors? A score that is too low suggests that you may be paying suppliers earlier than required, while a value that is too high shows that you may be experiencing cash flow issues. The ideal price should be somewhat less than your suppliers’ typical payment terms.

Accounting software like QuickBooks can easily collect the data needed to determine days payable outstanding. You may run many reports in QuickBooks that will provide you all the information you need to compute days payable outstanding, as well as assess cash flow and profitability.