Creditor Days (DPO): a Worked Example

A supplier who delivers today and is paid in forty-five days has made an unsecured, interest-free loan for forty-five days. Across a whole purchase ledger that credit can be larger than the overdraft. Unlike a bank facility it has no documents, no limit that the borrower can rely on, and no notice period. A lender wants to know how large it is, whether it is growing, and on what understanding.

The ratio alone cannot answer the last part. A rise may reflect a better deal won by a larger buyer, or a change in the mix of suppliers towards those on longer terms. Or the business may be choosing each week which invoices not to pay. The accounts look identical in all three, so the lender turns to the terms and the ageing.

Cost of sales is used because most sets of accounts show it, but it is an imperfect base. In a manufacturer it includes wages and depreciation, which do not pass through trade payables, so the days come out too low. In a business building stock, purchases run ahead of cost of sales and the days come out too high. Where the management accounts show purchases, the stricter version is better.

Three other points move the answer. Closing payables can be replaced by an average of opening and closing, which suits a business whose balance swings, though a lender with monthly data does better to read the months. Payables usually include sales tax (GST in New Zealand and Australia, VAT in the UK) while cost of sales does not. And amounts owed to the tax authority or to staff belong in other creditors: a lender reads those separately, because tax arrears mean something else again.

A stationery and office-supplies wholesaler, constructed for this page like every figure in it, buys on terms that have not changed in the period, and two years ago it was paying to them. Its overdraft has US$1.2m of unused headroom at the latest year-end.

Cost of sales rose 5% in two years while payables rose 71%, with the terms unchanged. The ageing shows US$2.05m past due, close to the extra credit the days imply. The sales tax line shows why levels need care: every year would come down by the same proportion, so the trend survives but the 62 does not, assuming all purchases carry the tax. Set the US$2.07m beside the headroom. If suppliers moved back to where they were two years ago, the overdraft could not pay for it. Those figures are the example's, and days vary widely by trade.

Debtor days and inventory days measure cash tied up; creditor days measure cash provided, which is why the cash conversion cycle subtracts them. A cycle that holds steady because creditors stretched while debtors slowed has not held steady at all.

Large buyers' behaviour is partly public. Large UK companies and LLPs report the average days they take to pay and the share paid late; Australian entities with income above 100 million Australian dollars report on payments to small suppliers to a public register. New Zealand legislated a similar regime in 2023 and repealed it in 2024. Many mid-market borrowers fall below those lines, so the aged list remains the main evidence. Supply chain finance adds another wrinkle, because long-dated payables owed to a finance provider can be debt in all but name.

DEFINED IN ONE PARAGRAPH → · CASH CONVERSION CYCLE, WORKED → · THREE DIAGNOSTICS →

It changes what a request for more working capital is for. A borrower may ask for a larger overdraft to fund growth, when the money would in fact go to suppliers who are owed. That is not necessarily a reason to decline, but it is a different loan: it adds no new sales, and the lender should size it knowing the supplier credit is being replaced by bank debt.

It is also an early warning. Suppliers tend to notice before banks do. Requests to go onto cash-on-delivery terms, a credit insurer cutting limits on the borrower, or a supplier newly reserving title to its goods are signs that trade creditors are reassessing. Year-end needs care too: a payment run held back past balance date, or brought forward, changes the closing figure (window dressing), which is why a lender prefers month-end balances over one annual date.