Q: I'm interested in what type of AP information should be included when looking at DPO calculations. Is it only trade payables? Should it include anything that goes into COS? We have several accounts that roll up into AP: Insurance payable, miscellaneous payables, payroll payables, etc. What is the best practice with this?
A: The answer to your question depends on what flows through your AP account and if your management wants to include all payment processing or just certain items. Some companies leave out payroll since its a current expense and does not typically run through an AP account. We are not aware of a specific best practice. However, here are a couple of thoughts:
- You can calculate a separate DPO for each payable if management wants to drill down to how quickly it pays trade payables vs. insurance payables vs. payroll payables etc...
- If items in your COS run through Trade Accounts Payable then you should consider including this in your DPO calculation to get a correct number
- Some companies use a 90 day rolling-daily-average expense value that is used as the value to divide into the Trade AP account amount outstanding at the end of a period, while others use a full 365 day average. The shorter average (90 day) is used if the business is growing rapidly and more correctly reflects the current operations vs. including values nearly a year ago that may not properly reflect what is happening currently.