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Creditor Days Ratio or Days Payable Outstanding- How to calculate it and interpret it

Days Payable Outstanding (DPO) or as it’s also called, creditor days ratio, is an efficient ratio that shows how long it takes for a company to repay its suppliers.

Creditor Days Ratio is used together with other ratios such as the accounts receivable days, the inventory turnover ratio in order to monitor the working capital.

Creditor Days Ratio or DPO Formula

The Creditor Days ratio can be calculated as follows:

Creditor Days Ratio = (Trade Creditors/Credit Purchases)*365

However, if information for the credit purchases is not be available, you can also use the formula below that will produce comparable results:

Creditor Days Ratio = (Trade Creditors/Cost of Sales)*365

You might be wondering what is the difference between these two formulas. Credit purchases should be included within the cost of sales. However, cost of sales will also include cash purchases. Therefore, including cash purchases too, the creditors days ratio will appear lower than it actually is.

In addition, there are analysts and accountants that prefer to also include purchases that not just from the cost of sales line but also from financial statements line items such as admin expenses. The reason for that is that if you make a purchase that does not directly relate to stock (such as stationery for example), using only the cost of sales effectively ignores these purchases, Therefore, if your income statement does not only include cost of sales but also other lines where purchases are included, make sure you add these too in order to calculate the creditor days ratio (or DPO as it’s also called).

Creditor Days Ratio Example

Let’s assume that we have two different companies (Company A and Company B). Company A is larger with company B and has a greater trade creditors at the year end but it also has a larger cost of sales balance.

The table below summarizes the specifics for the two companies but briefly, using the formula above, the creditor days ratio or else, the days payable outstanding ratio, is 36.5 days for Company A and 29 Days for Company B.

This is calculated by dividing the trade creditors by the cost of sales and multiplying the result with 365 which is the number of days in a financial year.

  Company A

Company B

Trade Creditors

$600,000

$800,000

Cost of Sales

$6,000,000

$10,000,000

Creditors Days Ratio (DPO)

36.5 Days

29 Days

Days Payable Outstanding Analysis & Interpretation

While Company B has a higher trade creditors at the year end, it also has a higher cost of sales. As a result, Company B has a smaller Creditor Days Ratio or Days Payable Outstanding Ratio.

The creditor days ratio for company B is 29 days and 36.5 days for company A. So what does that mean in practice? It means that company B takes a shorter period of time to repay its suppliers. In particular, it takes on average a slightly more than a week less to pay the invoices for purchases made.

While you might think that this is a good thing, that’s not always the case. In order to maintain, a healthy working capital, companies need to reduce the days it takes for clients to pay any amounts due but at the same time this can by achieved by delaying payments to suppliers.

However, as you might be able to guess, delaying payments it not something that your suppliers will be particularly happy about! It’s therefore important to be able to keep a balance between increasing the time it takes your company to pay invoices due (by improving credit terms for example) but at the same time maintaining good relationships with your suppliers.

Creditor Days or Days Payable Outstanding Ratio Calculator

The online calculator below can help you calculate the days Payable Outstanding ratio by simply filling the boxes with the trade creditors and the cost of sales figures.

 

Filed in: Accounting Tutorials, Tutorials

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