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Days Payable Outstanding (DPO) | Formula | Calculation | Example - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo or watch the video
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till the end and also if you are new to
this channel then you can subscribe us
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by clicking the bell icon. friends today we
are going to learn a topic that is a
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ratio basically pays payable outstanding
now this is a part of the ratio analysis
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chapter so if you fall short anywhere in
ratio analysis and this particular ratio
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then absolutely this is the right place.
Days payable outstanding is an
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important concept if you are running a
business or following a business as an
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investor, so it is one of the most
a significant part of the cash conversion
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cycle it's called the CCC okay. Days
payable outstanding help to measure the
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a business that takes to pay off its
creditors so in this specific tutorial we
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will discuss days payable outstanding
in detail and why it is one of the most
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a significant concept in the case of
business. let's get started now what is
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it days payable outstanding this is the
graph as you can see the of P&G and
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Colgate's the days payable outstanding
helps to measure time the business
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takes to pay off its creditors so let's
have a look at the graph here and we
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know that the Colgate's days payable
outstanding has been stable over the
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year as you can see the graph and is
currently trading at 67.24 days
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that is let's consider 67 days.
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however, when we you compare with Procter and Gamble we note that the P&G days
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payable outstanding has been
increasingly continuously since 2009
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and it's currently at a very high stage
of 106 so you can consider because it's
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four we can consider 107 days. so we
will first look at the formula of the
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days payable outstanding and then we'll
interpret the meaning of the ratio. So
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let's understand the formula of the
same the DPO that is days payable
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outstanding formula is your accounts
payable that's your AP divided by your
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cost of sales
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So, this is your accounts payable and over
here you will need to divide the cost of
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sales
here the cost of sales will again get
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divided with the number of days.
this is a formula for DPO so days payable
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outstanding is a great measure of
how much time a company takes to pay off
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its vendors and its supplies. If you look
at the formula see that the DPO is
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calculated through dividing them the
total ending average accounts payable by
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the money paid per day or per quarter or
per month as you can see now for example
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if a company has a DPO of let's say 40
days okay when we say hey the company is
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having a dpo of 40 days to pay off its
suppliers or vendors on an average and
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you can have a look at the detail on a
guide on the account note what does this
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exactly mean so it means that the
company takes around 40 days to pay off
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its supplier or vendors on an average.
let's take an example so that you will
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have a clear idea on the same let's say
there is a company called Xomic which
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has a reputation of paying its vendor
quickly so it has an ending account
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payables balance as let's say $30,000
its cost of sales is let's say $365,000.
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now you what you need to do is just need
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to find out the days payable outstanding
for company xomic. Now this is a very
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simple example all we need to do is just
to feed in the data to into the formula
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so the DPO days payable outstanding is
going to be your ending accounting
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payables divided by the cost of sales
right divided by the number of days so
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the cost of sales over here is $357,000 or
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$65000 divided by the total
number of days that is 365
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close the bracket and you have number of
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days as 30 days
so only computing the days payable outstanding
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of a company isn't enough we
need to look at it holistically as when
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we look at the holistic interpretation
now so how should a company look at the
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payable outstanding see for a company to
succeed it should look holistically by
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calculating the days payable outstanding
our company may get how much time it
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takes to pay off its suppliers and
vendors but that's not alone I mean
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that's know that won't do any good until
the company does few things what is what
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are those things okay
no issues we can start with that the
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first thing firstly the company should
look at the industry
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industry and the average days payable
outstanding in the industry okay second
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thing if the companies days payable
outstanding (DPO) is less than the average
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days payable outstanding of the industry then in that
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the particular scenario than the company
may consider increasing its day's payable
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outstanding but the organization should
remember that doing this doesn't cause
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them to a vendor I mean it doesn't cause
the within the vendor or any favorable
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benefits from the suppliers so keeping
these two things in mind if a company
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can match up with days payable
outstanding with the average days
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payable outstanding of the industry the
company would be able to use the cash
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flow
for better use for a longer period of
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time
the third thing if the company's days
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payable outstanding if if just do a
opposite thing
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if the DPO is greater than the ADPO
okay then the company may consider
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decreasing it's days payable
outstanding over here increasing and
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over here decreasing its days payable
outstanding right so doing this well
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allow them to satisfy the vendors and
vendors would also be able to provide
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the company a favorable terms and
conditions fourthly the company should
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also, look at these similar companies and
how they are approaching the days payable outstanding.
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now if the company notices
closely then they would be able to see
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the consequences of the approach and in
the company can get better idea about
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whether to increase the day's payable
outstanding or to decrease the days
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payable outstanding finally fifth along
with the DPO the company should I mean
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also should look at the two factors
should look at the two factors of the
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cash conversion cycle so there are
days inventory outstanding (DIO), the DSO
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which is called days sales outstanding.
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outstanding since all this three are
required to form the cash conversion
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cycle it is important that company pays
heed to all three right and it will give
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them a holistic view and they would be
able to improve their efficiency in the
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long run now how does the whole process
works see understanding the whole
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process of days payable outstanding will
definitely help in understanding in
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detail see a company needs to first what
it needs to purchase the raw material
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inventory from the vendors of the
supplier second these raw materials
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can be sourced
into two ways first the company can buy
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the raw material in cash
and another way you can purchase
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the raw material
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on credit right so if a
company is purchasing a raw material
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in bulk then the supplier
vendor allows the company to buy on
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credit and pay off the money or on a
later date the difference between the
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time they purchase from the supplier and
the day they make the payment of the
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supplier is called DPO.now whatever we
explained I mean above is is a
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simplification of dpo in real scenario
the thing are much complex and and
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company needs to deal with the multiple
vendors and suppliers so depending upon
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how much time a company takes to pay off the due, the supplier offers many benefits
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for early payment like discount on bulk
orders you can say discount on the bulk
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orders the amount of pay etc
these are the sector examples of the
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days payable outstanding this is the
the first is the airline sector as you can see
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the American Airlines days payable is
35 the highest is of azul and the
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Delta Airlines, JetBlue, Southwest, United
Continental, China Southern Airlines, and
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so on and so forth what we observe is
that there is a varied payment terms and
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payable days outstanding ranging
from 0 to 134 close enough to know not
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130 for at least in the range the
airline companies have varied payment
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terms and that is reflected in the
payments and outstanding days the China
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Southern Airlines as you can see I mean
has the China not Eastern the southern
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one
the China Southern Airlines 13.30 it
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has the least low payment outstanding
days whereas if you see the latam
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airlines group 60.48 it is
the highest amount with the group at at
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60.48 that's 61 days
you can consider so that's it for this
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particular topic if you have learned and
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