{"id":1061,"date":"2023-09-21T09:36:49","date_gmt":"2023-09-21T07:36:49","guid":{"rendered":"https:\/\/creditanalyst.eu\/?p=1061"},"modified":"2023-09-21T09:36:51","modified_gmt":"2023-09-21T07:36:51","slug":"how-to-calculate-payables-days-dpo-the-flaws-of-the-standard-formula-and-some-potential-solutions","status":"publish","type":"post","link":"https:\/\/kurtovicfinancial.com\/en\/how-to-calculate-payables-days-dpo-the-flaws-of-the-standard-formula-and-some-potential-solutions\/","title":{"rendered":"HOW TO CALCULATE PAYABLES DAYS \/ DPO? The flaws of the standard formula and some potential solutions"},"content":{"rendered":"\n

The standard textbook formula:<\/p>\n\n\n\n

Payables days = 365 * Trade payables \/ COGS<\/p>\n\n\n\n

(You might also see average trade payables, but for the sake of simplicity let\u2019s leave this element out)<\/p>\n\n\n\n

So, what is wrong with the formula above?<\/strong><\/p>\n\n\n\n

#1 \u2013 Issue with trade payables<\/strong><\/p>\n\n\n\n

Getting the trade payables figure from financial statements is pretty much easy.<\/p>\n\n\n\n

But what happens when the company does not receive invoices for the costs already included in COGS?<\/p>\n\n\n\n

Companies book this part under the \u201caccrued expenses<\/strong>\u201d account in the balance sheet.<\/p>\n\n\n\n

This means we should probably include this element too in the calculation of trade payables.<\/p>\n\n\n\n

Why?<\/p>\n\n\n\n

Well, we don\u2019t know what it the reason why the company has not booked some invoices. <\/strong>Perhaps they close their books really fast and do not leave enough time to book everything. Or perhaps the suppliers are slow with sending invoices.<\/p>\n\n\n\n

The fact is that we don\u2019t know, and because of this uncertainty, I tend to include this figure in the calculation.<\/strong><\/p>\n\n\n\n

(Pro tip: trade payables can sometimes include payables towards suppliers for Capex which distorts the calculation, so make sure to exclude this if you have info\u2026)<\/p>\n\n\n\n

#2 \u2013 Issue with COGS<\/strong><\/p>\n\n\n\n

Including only COGS in the formula can be misleading.<\/p>\n\n\n\n

Many companies do not have high COGS but may have high SG&A<\/strong> (don\u2019t forget to exclude labour costs from SG&A!).<\/p>\n\n\n\n

If we look deeper into the SG&A specification, we will likely find the costs like rent, marketing, advisory, maintenance\u2026which all have trade payables attached to them!<\/p>\n\n\n\n

So, excluding this part of the SG&A from the formula can change the conclusion dramatically.<\/p>\n\n\n\n

I would advise to include at least a portion of the SG&A into the formula, depending on the level of information you have at hand.<\/strong><\/p>\n\n\n\n

(Pro tip: COGS also includes a portion of costs like labour, depreciation and amortization\u2026which don\u2019t have anything with trade payables, and this creates another issue)<\/p>\n\n\n\n

________<\/p>\n\n\n\n

If you are an insider (controller \/ FP&A \/ CFO\u2026), you will probably have all the necessary information to be more precise in calculating payables days.<\/p>\n\n\n\n

If you are an outsider (banker, investor\u2026), you will rely on externally available info like annual accounts etc. and the level of detail will be limited, so take this into account.<\/p>\n\n\n\n

Whichever formula we use, we will never get the 100% right figure. Still, with meaningful adjustments we can improve our understanding of the business.<\/strong><\/p>\n\n\n\n

And understanding the true payables days of your customers impacts their credit ratings and credit limits \u2013 i.e., your cash flow.<\/strong><\/p>\n\n\n\n

________<\/p>\n\n\n\n

CreditAnalyst(.eu) <\/strong> Credit Risk Management | Debt Advisory | Financial Planning<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

The standard textbook formula: Payables days = 365 * Trade payables \/ COGS (You might also see average trade payables, but for the sake of simplicity [\u2026]<\/span><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,22],"tags":[133,32,59,183,29],"class_list":["post-1061","post","type-post","status-publish","format-standard","hentry","category-credit-guide-2","category-credit-insights","tag-cash-flow","tag-financial-statements","tag-financial-statements-analysis","tag-payables-days","tag-working-capital-management"],"_links":{"self":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1061","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/comments?post=1061"}],"version-history":[{"count":1,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1061\/revisions"}],"predecessor-version":[{"id":1062,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1061\/revisions\/1062"}],"wp:attachment":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/media?parent=1061"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/categories?post=1061"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/tags?post=1061"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}