The average sale period (PMV) is the temporary space that takes place from the moment a product is finalized and stored until the sale occurs.
The average sale period (PMV) is one of the phases of the average maturity period (PMM) . It is an economic indicator that allows us to have an idea of the time it takes to sell a product since its completion.
This is extremely important information for the company. Above all, when planning production and resources. The shorter the average sale period (PMV) the better it will be for the company. Of course, the PMV will depend a lot on the sector in which we find ourselves.
For example, the PMV can be very small for a churrería and larger for a company that builds houses. A churrería manufactures on request. We order a chocolate with churros and the second it is produced, it is already being sold. Conversely, a company that builds houses (unless they are on request) will construct a building to later sell flats separately (after a few days or months).
Calculation of the average sale period
We have made it clear that the average sale period may vary by sector. This is something that we must take into account when interpreting the figures. The smaller the better, but the ideal is to compare the PMV of two companies that operate in the same sector. Of course, to compare it, it is essential to learn how it is calculated.
The formula for the average sale period (PMV) is:
Where RPT refers to the rotation of finished products. Which is calculated according to the following formula:
If we continue disaggregating the formula, we can establish that:
Cost of sales = Ei of PT + annual cost of PT – Ef of PT
Average stocks = (Ei + Ef) / 2
Where:
Ei: Initial stocks
PT: Finished Products
Ef: Final stocks
As we have just seen, to calculate the average sale period (PMV), previous calculations are required. The formula is simple, but first we must calculate the average turnover of finished products.
Another way to calculate the average sale period (PMV)
Mathematically, we can calculate the average sale period with another formula. Go ahead, which is actually the same calculation. Although it seems different, if we solve in the equation, the final result is the same:
Where:
Average cost of sales = Cost of sales / 365
To demonstrate that the end result is the same, we have developed the formula as follows:
As we check at the end, the formula is equivalent to the initial one.
Importance of the average sale period (PMV)
Although it seems like a simple accounting calculation, the importance of the average sale period (PMV) goes much further. We have to think that, under normal conditions, having finished products in our warehouse is a negative thing. It is true that having a certain stock allows us to deal with orders at a certain time. However, the quantity of finished products in warehouse must be controlled.
As long as we have finished products in our warehouse. That is, unsold manufactured products, there are various consequences. The first is that we will have limited production. Space in our warehouse is limited. On the other hand, in the case of perishable products (which expire, for example, food), we may even lose that production. That is, the production is not in a condition to be sold. Also, financially, it is money that we are not entering. A money ( liquidity ) that we might need to continue paying suppliers or expenses that we have to face as a company.
The “Average Sales Period” (PMV, which stands for “Periodo Medio de Venta” in Spanish) is a financial metric used to determine the average time it takes for a company to convert its inventory into sales. To explain this concept clearly, I’ll create a tabular guide format that outlines the key aspects of PMV:
- Definition: A brief explanation of what PMV is.
- Formula: The mathematical formula used to calculate PMV.
- Example Calculation: A simple example to illustrate how PMV is calculated.
- Interpretation: How to understand the PMV results.
- Importance: Why PMV is a crucial metric for businesses.
Let’s create this guide:
| Aspect | Details |
|---|---|
| Definition | The average time (usually in days) it takes for a company to turn its inventory into sales. |
| Formula | PMV = (Average Inventory / Cost of Goods Sold) * Days in Period |
| Example Calculation | If a company has an average inventory of $50,000 and the cost of goods sold is $600,000 in a year, then PMV = ($50,000 / $600,000) * 365 = 30.42 days. |
| Interpretation | A lower PMV indicates a faster conversion of inventory into sales, which is usually positive. A higher PMV suggests slower sales, which might indicate inventory management issues or less demand. |
| Importance | Understanding PMV helps in managing inventory efficiently, improving cash flow, and making informed purchasing decisions. |
This guide provides a concise yet comprehensive overview of the Average Sales Period, helping businesses and individuals grasp this important financial concept.
