Financial modelling terms explained

Days Payable Outstanding

Days payable outstanding (DPO) is a measure of how long a business waits to get paid for the goods and services it sells. DPO is the number of days between the invoice date and the day the customer pays the invoice.

What Is Days Payable Outstanding?

Days payable outstanding (DPO) is a liquidity metric that measures how long a company takes to pay its suppliers. It is calculated by dividing the total amount of payable by the average daily cost of goods sold. A higher DPO indicates that a company is taking longer to pay its suppliers, which could be a sign of financial distress. Investors and analysts use DPO to measure a company's liquidity and credit risk.

How Do You Calculate Days Payable Outstanding?

In order to calculate days payable outstanding, you first need to determine a company's average payable period. This is calculated by dividing the total amount of days it took the company to pay its bills by the total amount of days in the period. The result is then multiplied by 365 to get the average number of days. To calculate the days payable outstanding, simply subtract the average payable period from the current date.

What Do You Have to Watch Out For When Calculating Days Payable Outstanding?

When calculating days payable outstanding (DPO), you have to watch out for accruals, which are expenses that have been incurred, but not yet paid. For example, if a company pays its employees on the last day of the month, but the employees have worked since the first day of the month, the company has to account for the wages that have been accrued during that time. The company's DPO would be higher than if it paid its employees on the first day of the month, because it would have to account for the wages that were accrued during the previous month.

You also have to be careful when calculating DPO for companies that have a lot of seasonal employees. For example, a company that hires a lot of temporary workers for the holiday season would have a higher DPO in December than in January, because the company would have to account for the wages that were accrued during the previous month.

Finally, you have to be careful when calculating DPO for companies that have a lot of long-term debt. For example, a company that has a lot of long-term debt would have a higher DPO if it paid its suppliers in 30 days, than if it paid its suppliers in 60 days. This is because the company would have to account for the fact that it has to pay its suppliers in 30 days, but it doesn't have to pay its lenders in 30 days.

What's the Difference Between Days Payable Outstanding and Days Sales Outstanding?

Days payable outstanding (DPO) is the average number of days it takes a company to pay its suppliers. Days sales outstanding (DSO) is the average number of days it takes a company to collect payments from its customers.

A high DPO means that a company is taking a long time to pay its suppliers, which could be a sign of financial trouble. A high DSO means that a company is having trouble collecting payments from its customers, which could be a sign of financial trouble.

What is an Example of Days Payable Outstanding?

Days payable outstanding (DPO) is a measure of a company's liquidity that expresses the number of days it would take the company to pay its suppliers if it used all of its available cash to do so. It is calculated by dividing the average accounts payable balance by the company's average daily sales.

An example of days payable outstanding would be a company that has an average accounts payable balance of $10,000 and an average daily sales of $1,000. This company would have a DPO of 10 days.

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