Trade payables turnover (days)

What is Trade Payables Turnover?

Trade Payables Turnover tells us how many times a company pays its suppliers in a year. Think of it as the “speed” at which a shop clears its shopping list. The faster the turnover, the quicker the shop pays its bills.

Days Payable Outstanding (DPO) – The Key Formula

Days Payable Outstanding (DPO) is the average number of days a company takes to pay its suppliers.

Why 365? Because we want the answer in days.

Step‑by‑Step Calculation

1. Find Average Trade Payables
   • Use the formula: $$\text{Average Payables} = \frac{\text{Opening Payables} + \text{Closing Payables}}{2}$$
   • Example: Opening Payables = £12,000, Closing Payables = £18,000 $$\frac{12,000 + 18,000}{2} = £15,000$$
2. Obtain Cost of Goods Sold (COGS) from the income statement. Example: COGS = £120,000
3. Plug into the DPO formula: $$\text{DPO} = \frac{15,000}{120,000} \times 365 \approx 45.6 \text{ days}$$
4. Interpret: The company takes about 46 days to pay its suppliers.

Analogy: Grocery Shopping

Imagine you run a small grocery shop. • You buy fresh produce from suppliers every week. • You keep a shopping list (accounts payable). • The turnover is how many times you check off that list in a year. • DPO is the average number of days you wait before paying the supplier. If you pay after 30 days, you’re giving the supplier a 30‑day “credit” window.

What Does a High or Low DPO Mean?

• High DPO (e.g., 70+ days)
  • Company is slow to pay suppliers.
  • Could be good cash flow, but may strain supplier relationships.
  • ⚠️ Risk of late payment penalties or loss of supplier discounts.
• Low DPO (e.g., 20–30 days)
  • Company pays quickly.
  • Good supplier relationships, but may use cash that could be invested elsewhere.

Exam Tip: Quick Calculation Trick

Remember: $$\text{DPO} = \frac{\text{Average Payables}}{\text{COGS}} \times 365$$ • Average Payables = (Opening + Closing)/2 • If the question gives you Average Payables directly, skip the first step. • Round to the nearest whole day unless the exam says otherwise. • Check your answer against the industry benchmark if provided.

Practice Question

Company X has opening trade payables of £8,000 and closing trade payables of £10,000. Its Cost of Goods Sold for the year is £200,000. Calculate the Days Payable Outstanding.

1. Average Payables: $$\frac{8,000 + 10,000}{2} = £9,000$$
2. Plug into DPO formula: $$\frac{9,000}{200,000} \times 365 \approx 16.4 \text{ days}$$
3. Answer: Approximately 16 days.