All payments correspond to a way of liquidating the obligations contracted for the fulfillment of a consideration for a service and also for the purchase of products.
Every company, whether it is a producer or simply a marketer, incurs a series of costs and expenses that must be covered, whatever the form of purchase and payment the company must respond to these commitments with the utmost seriousness and punctuality, in order to establish a good relationship with its suppliers.
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To know the payment ranking of the company, administratively it takes what is known as Average payment period (PMP), which must be handled with care and balance, because if the company lags its payments for a long time, it will have higher cash flow and money as working capital, however, your suppliers will have some discontent that may lead them to deny credit to future.
In this article you will find:
What is Average Payment Period?
The PMP is an indicator that shows the time it takes the company to make the payment of its with suppliers, it is generally polled quarterly and sometimes annually.
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To understand this definition, it is necessary to consider that the PMP indicator varies by industry. Therefore, it is recommended to make a comparison with other industries in the sector, to have a proper perspective of your pay time.
For example, the industry handles an average payment of 35 days and the company under study makes its payments within 15 days, this company may consider delaying its payments a few days, in this way to expand your cash flow (as long as you do not lose discounts, lose credit, have to buy at a higher value or affect the business relationship with your suppliers).
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Also the PMP can vary according to the year, the economic situation of the country or general and the performance of the company.
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How is it calculated?
The PMP is calculated with the average balance of suppliers dividing it between the purchases (item of supplies and other expenses) is then multiplied by the total days of the period or years (365 days).
Average payment period = average of suppliers / purchases x 365
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Regarding the result, the higher this value, the greater the delay applied by the company in the payments of the invoices with its suppliers, which also connotes that said company is financed in part thanks to these extensive credits of pay.
Currently it is necessary for companies and suppliers to achieve a "win to win" relationship as a technique of quite effective negotiation, which aims to achieve that both parties benefit and are strengthened in the negotiation.
Important considerations about the PMP
Buying and selling are two activities of great importance in the performance of a company, which are seen in the administrative management, in this sense, the company's accounting records the entries and exits for these concepts.
To pay its purchase invoices, the company needs solvency and this comes thanks to sales, so it deserves an excellent collection work. After registering the payments made by the clients, the company prepares to pay its suppliers, in this sense the PMC and PMP indicators are interrelated and it is recommended that the Average Payment Period is greater than Average PMC Collection Period, In this way, the company operates normally and has the ability to pay based on the payments it receives.
The PMP is calculated in order to know and express the payment time and the delay that could occur in the payment of any commercial debt.
The payment terms are stipulated in the same regulations and proceed from the companies, however, it is important to consider that suppliers as a company also have their collection regulations, so certain agreements must be reached for win win.
