Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more
Meaning of Days Payable Outstanding
Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.
If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.
Formula
The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.
Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.
Example
ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.
| S.No. | Particulars | Amount |
| 1. | Average Accounts Payable | 45,000 |
| 2. | Cost of Goods Sold | 2,25,000 |
| 3. | Number of Days | 30 |
Calculation Part-
Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold
= 45,000 * 30/2,25,000
= 6 Days
In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.
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Meaning of days sales outstanding Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables isRead more
Meaning of days sales outstanding
Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables is very long and might lead to problems in the cash flow of the company while on the other hand, a low DSO shows that the company is able to collect the amount in fewer days. It is important to note here that the formula for DSO is applicable only in relation to the credit sales of the company.
The formula to calculate days sales outstanding is as follows:
DSO can be calculated on a monthly, quarterly, or yearly basis depending on the terms of the company.
Example
XYZ Ltd. made credit sales amounting to 7,00,000 in October, out of which 4,00,000 are yet to be received. As there are 31 days in October, the DSO for XYZ Ltd. shall be calculated as follows:
DSO = Accounts receivables/ Total credit sales x No. of days
= 4,00,000/7,00,000 x 31
= 17.7 days
In my opinion, 17.7 days is a low average turnaround for a company to collect cash from accounts receivables in a month and hence portrays a good DSO however, it varies from company to company what they consider to be a high or low DSO.
Hope this helps.
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