Wonder what is your company’s best practices and methods for calculating DPO? Currently, our company uses below calculation for monthly DPO. The numerator is the outstanding unpaid invoices and denominator is sum of one year of the cost of goods sold plus operation expenses divided by 365. Is this calculation correct? Any comments or suggestion would greatly appreciated! DPO = Accounts Payable /(Average(OPEX+COGS)/365)
DPO Calculation
Answers
In general the formula is correct but you need to take out Salaries & Payroll Taxes since that is not a component of AP.
It has been awhile since my manufacturing days.....I don't think the formula is right. (maybe I am wrong...or behind the times)
1. How do you "average" opex+cogs?
2. If you do in case figure out how to "Average" opex+cogs, dividing it by 365 gives you a daily average of an average?
3. Should you NOT use "average" AP if you want to compare (divide it by) it with an average ?
4, From my recollection, the opex+cogs should NOT be averaged. or at least make the source data (numerator & denominator) consistent and comparable.
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Thank you everyone for your comments.
My apologies! DPO formula use by our company is as below:
DPO = AP ending balance (Unpaid invoices plus outstanding checks)/(sum of 12 months of OPEX and COGS minus Payroll / 365)
I am in agreement with you on consistency. Currently, our company takes different approach for DSO and DPO calculation. For DPO calculation, the source data for denominator is from P&L as shown in above. For DSO calculation (shown in below), the source data for denominator is taken from our monthly net-billed revenue rather than the Revenue number from P&L. These calculations provided misleading information on our working capital. Wondering what should be the best practice for calculation DSO and DPO for working capital. Thank you.
DSO = Ending AR provided by Billing Team (Total outstanding bills) /(sum of 14 months Net Billed Revenue / 365)
I am not sure I like COGS-what if I buy a lot of inventory ahead of time-my COGS may be low, my purchases high, and my AP high.
Maybe use COGS plus change in inventory levels, and OPEX excluding payroll and depreciation. If you have high CAPEX that is not financed via loans, you may need to handle that too.
Three answers, three possible outcomes, all possibly correct.
Instead of using "DPO" (see my first sentence), why not take a step back and figure out what you want to know, what you will do with the metric once you find it, and then back into a formula that solves the question.
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Accounting