The average maturation period or exploitation cycle is the average time that elapses between payment to suppliers for the purchase of raw materials and payment to customers for the sale of finished products.
In simpler words, the average maturity period (PMM) are the days it takes for a company to recover the money it has spent since the initial purchase of raw materials. That is, it is the life cycle of exploitation of a product. It is also known as the average period of economic maturation.
Stages of the exploitation cycle
The average maturation period consists of several stages, but 5 of them stand out:
- Average supply period (PMA):It is the time that passes from when the materials are purchased until they are introduced into the production process. It is found by dividing the average balance of raw materials by the amount of raw materials consumed daily.
- Average manufacturing or production period (PMF): It is the time required to manufacture the products. It is calculated by dividing the average balance of the products whose manufacture is in operation, by the daily cost of production.
- Average sales period (PMV):It is the time that elapses from when a product is finished to its sale. The PMV is obtained by dividing the average balance of finished products in the warehouse by the finished products sold in one day.
- Average collection period for customers (PMC): It is the time between the sale and the collection of the product. The average balance of accounts receivable from customers is divided by the daily sales on credit.
- Average provider payment period (PMP): Thisis the time it takes to pay providers. It is calculated by dividing the average balance of accounts payable to suppliers by the average daily accounts on credit.
When a medium maturity period (PMM) is considered short, it means that they operate at a rapid rate in addition to an efficient and effective organization. The number of times a cycle repeats is defined as “rotation”, so that the lower the PMM, the greater the number of rotations. However, a high PMM means a low turnover and therefore a greater volume of financing with higher costs.
Calculation of the average maturation period
The average maturity period (PMM) is calculated as the sum of the average periods described above, not counting the average period of payment to suppliers:
PMM = PMA + PMF + PMV + PMC
If we also take into account the average supplier payment period (PMP), we would be calculating what is called the average financial maturity period (PMMF), which is calculated as follows:
PMMF = PMM – PMP
The average ripening period is easier to understand graphically. According to the life cycle of a company, we can build the following diagram of the exploitation cycle: