Days Payable Outstanding (DPO)
Days payable outstanding is the financial ratio which use for the calculation of average time of company to pay its bills and invoice to other company by comparing the account payable, cost of sale and number of days bill remains unpaid.
Definition: What is Days Payable Outstanding (DPO)?
For the payment of invoices from supplier and vendors, the company takes the number of days. it is called DPO. DPO use to measure the ability of the company that how the cash flow of the company is managed. This ratio may be used quarterly or annual bases. If the company take time to pay its bills and during that it if the company has access to cash they can do many works during this time period.
We assume company a which take raw material from vendors on credit for 30 days. As this is not payable for 30 days so company take this as a cash value and use this cash for other operation.
A company which has high DPO then it can use for producing more goods and earning instead of paying the invoice.
Days Payable Outstanding Formula (DPO)
When we divide accounts payable by the derivation of the cost sales and numbers of days then we get Days payable outstanding as
Days payable outstanding = Accounts payable/(Sales cost/number of days)
There are three terms using in this formula.
Accounts payable: It is the money that companies owes a vendor for purchase and it made on credit. It is found on the balance sheet of a company.
Cost of sales: For the manufacturing of the product total money incurred by the company is called cost of sales. It includes all the cost such as raw material, rent, utilities etc.. On the income statement of company cost of sales can be found.
The number of days: Numbers of days maybe 365.
here is the manufacturing company which purchase material from many vendors. At the end of the year, its account payable is 1,000,000 dollars and average invoice for each day is 15,000 dollars high for 1 year is 5,475,000 dollars. Company DPO is
So days payable outstanding is 67 days for this company
Analysis and Description
DPO is the financial measurement which investors use to measure the operational efficiency of the company. If the DPO is high then it means that the company takes time long to pay its vendors or suppliers as compared to that company which has low DPO. Companies which have high DPO use their cash for short term investment as compared to low DPO.
As well as for high DPO companies there are the disadvantages. Because it is up to vendors or suppliers that paid early to the company or not and maybe refuse to do business with the company. SO it is necessary for the company to make happy the vendor.
Comparing the company DPO with other company DPO is very important. Because if the company pay its invoices in 15 days whereas industry paying them in 50 days then it means that company is at the disadvantage because this company cannot use the cash flow quickly as compare to other company. Because this company needs to give length the time period for improving the cash flow up to 45 days or 40 days.
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