Average payment period (PMP)
The average payment period is defined as the average days it takes a company to pay suppliers.
This ratio, expressed in days, is very important to know and control from any financial department of a company, since its treasury management is based on it. However, it is also crucial to know it when analyzing the financial status of a company.
Seen from the point of view of the exploitation cycle, the PMP is the number of days that elapse from when the company acquires the raw material until it pays the supplier.
The higher the value of this ratio, the longer the payment to suppliers is delayed, which reveals that the company is financing itself thanks to them.
This ratio is studied together with the average collection period. By analyzing both ratios, it is possible to know not only the financial status of a company, but also its bargaining power.
Weighted Average Price (PMP)
Calculation of the average payment period
It is calculated by making an average of the average suppliers (Suppliers year x + suppliers year x-1) / 2.
All of this is divided by the purchases in 2014, which are reflected in the profit and loss account, taking into account the value added tax (VAT) incurred for the year.
All of this is multiplied by 365 days.
Next, we have a balance sheet of a company Z for the years 2013 and 2014. For this we calculate the average payment period, which is 42 days.
It is important to analyze at this point, if the average payment period is higher or lower than the average payment period.
- PMP> PMC = company in a normal situation, where it first charges and then pays its suppliers.
Ideally, the average payment period is higher than the average collection period, which would imply that we charge earlier than we have to pay suppliers.Weighted Average Price (PMP)
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