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Days payable outstanding definition

Description

Days payable outstanding (DPO) indicates the amount of days needed to cover accounts payable to creditors in the given period of time (per year, per quarter and etc). Data to calculate this ratio is collected from balance sheet and income statement.

This ratio mostly interests company’s short term creditors, as it shows company’s ability to cover its’ short term debts. When calculating payable turnover ratio, total purchases are divided by the average account payable, but also cost of goods sold can be used instead of total purchases.

Norms and limitations

A high value of DPO shows that the company might have difficulties covering its’ payments to short term creditors. Also it might mean that the company has negotiated very favorable conditions from their suppliers. In other way if the value of the ratio is low, it indicates faster payments to suppliers.

There are no general norms for this ratio. It is recommended to compare this ratio with those of the companies, working within the same industry.

Formula

Cost of goods sold (COGS, Cost of sales) is the cost that goes directly into creating the products that a company sells.

Accounts payable is a balance sheet entry that shows company’s obligations to pay its’ short term liabilities (liabilities that must be covered within the period of 12 months) to its creditors (most often to suppliers).