Days Payable Outstanding (DPO)
What it is:
How it works/Example:
For example, let's assume Company XYZ is a department store. If its cost of goods sold is $10,000,000 this balance sheet shows $7,000,000 of payables, then we can calculate that Company XYZ's DPO:, and the
DPO this= $7,000,000/($10,000,000/360) = 252 days
Let's compare this with last DPO last was:, when Company XYZ had $6,000,000 of cost of goods sold. If the balance sheet showed $4,000,000 of payables, then Company XYZ's
DPO last= $4,000,000/($6,000,000/360) = 240 days
The increase in DPO indicates that Company XYZ is taking longer to pay for its suppliers.
Why it matters:
inventory account by $1,000,000 and increase its accounts payable by $1,000,000. When 60 days has passed and Company XYZ pays the invoice, it reduce by $1,000,000 and reduce its accounts payable by $1,000,000.( ) are amounts owed to suppliers and other creditors for goods and services. If Company XYZ orders $1,000,000 in widget parts from its supplier and has 60 days to pay for those parts, it increase its
When accounts payable or DPO decrease, this is considered a use of , and as such, it reduces the company's working capital (defined as current assets minus ). When accounts payable or DPO go up, this is considered a source of because the company is taking longer to pay its invoices and thus not using as quickly.
Accounts payable is an important grace period and that in the business instead. Changes in the DPO indicate which way this is trending and in turn how well management is retaining .in a company's working capital. If it's too high, the company may soon be struggling to find the to pay the bills; if it's too low, the company may be unwisely directing its toward paying the bills too soon rather than enjoying the full
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