Days Payables Outstanding = Accounts Payable/(Cost of Sales/360)
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.
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
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
The cost of tuition has skyrocketed in the last 30 years. According to Bloomberg, college tuition fees have jumped more than 13-fold since...Read More →
"We're overbought." "We've got resistance." "This rally...Read More →