The average maturation period or operating 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 mean maturity period (PMM) is the days it takes a company to recoup the money it has spent since the initial purchase of raw materials. In other words, it is the operating life cycle of a product. It is also known as the mean period of economic maturity.
Stages of the exploitation cycle
The average maturation period consists of several stages, but 5 stand out among them:
- 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 until its sale. The PMV is obtained by dividing the average balance of finished products that are in the warehouse between the finished products and sold in a day.
- Average customer collection period (PMC): It is the time between the sale and the collection of the product. It is achieved by dividing the average balance of accounts receivable from customers by daily credit sales.
- Average supplier payment period (PMP): It is the time it takes to pay suppliers. It is calculated by dividing the average balance of accounts payable to suppliers by the average daily credit accounts.
When a medium maturity period (PMM) is considered short, it means that they operate at a rapid pace in addition to an efficient and effective organization. The number of times a cycle is repeated is defined as "rotation", so the lower the PMM, the greater the number of rotations. However, a high PMM implies a low turnover and consequently 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 maturation period is easier to understand graphically. According to the life cycle of a company, we can build the following scheme of the exploitation cycle: