Days Payable Outstanding (DPO), or as it’s also called, creditor days ratio (CDR), is an efficient formula that shows how long it takes for a company to repay its suppliers.
CDR is used together with other ratios such as the accounts receivable days and the inventory turnover ratio to monitor the working capital.
Creditor Days Ratio or DPO Formula
You can calculate the CDR by applying the formula:
Creditor Days Ratio = (Trade Creditors/Credit Purchases)*365
However, if information for the credit purchases is not 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 the difference between these two formulas is. You should include credit purchases within the cost of sales. However, the cost of sales will also include cash purchases. Therefore, including cash purchases too, the creditors days ratio will appear lower than it is.
In addition, some analysts and accountants also prefer to include purchases from the cost of sales line and 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 the 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 companies (Company A and Company B). Company A is larger than company B and has more significant trade creditors at the year-end. And has a higher cost of sales balance.
The table below summarises the specifics for the two companies but briefly, using the formula above, the creditor days ratio or else, the day’s 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|
|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 higher trade creditors at the year-end, it also has a higher cost of sales. As a result, Company B has a smaller CDR or DPO ratio.
The CDR 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 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. To maintain healthy working capital, companies need to reduce the days it takes for clients to pay any amounts due, but at the same time, the companies can achieve this by delaying payments to suppliers.
However, as you might be able to guess, delaying payments is not something that your suppliers will be pleased 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 Calculation
The online calculator below can help you calculate the day’s Payable Outstanding ratio by simply filling the boxes with the trade creditors and the cost of sales figures.