MANAGEMENT CHAT—Average Payment Term: Learn to Calculate

Rafael Correa da Costa contato@agroflysistemas.com.br

The Average Payment Period (APP) shows how much time you have to settle accounts with your suppliers from the date of purchase. The longer this period, the better for your cash flow, as money from services does not always come in quickly. If you know how to use this indicator in your financial management, you will be able to better reconcile the payment and receipt dates improving cash flow projections.

The APP, also called the Average Payment Term to Suppliers, is an essential indicator for the company’s financial management. It shows how long it takes the company, on average, to pay for products, services and supplies. For this, the APP considers the interval between the purchase date and the effective payment to third parties. With this result in hand, the manager is able to assess the impact of accounts payable on cash flow, reconcile payments and receipts, make projections and better manage working capital. For this reason, the APP is one of the most important KPIs (Key Performance Indicators) to understanding the behavior of finances in the organization. For a more complete analysis, it is also necessary to consider the average time for payment receipt of application services.

With the APP, you know exactly how much time you have to pay your suppliers from the date of purchase and in this way you can organize better. When calculating the APP of suppliers, it is easier to keep accounts up to date and avoid delays or defaults in the company. After all, if you know how much time you have to pay off your purchases, you can plan to make payments on the correct dates and prepare your cash for these costs. This avoids losses from penalties and interest, in addition to the feared wear and tear on the relationship with suppliers and partners.

APP also helps you gain a more accurate view of finances and project your cash flow more efficiently. In addition to monitoring weekly and monthly reports with cash movements, it is necessary to estimate revenues and expenses for future periods as an essential part of corporate financial planning.

One strategy used to improve the company’s financial health is to seek alignment between payment dates from suppliers and receipt of money for services. The goal is to receive as quickly as possible and have the maximum term to pay for the products, accelerating the financial cycle of the business. With APP, you can better schedule payment dates and compare payment terms, always looking for a balance in cash and optimizing working capital.

The APP is an essential data to calculate the Net Working Capital. With the defined period, you can determine the financial reserve necessary to cover all the company’s accounts, considering the interval between the settlement of purchases from suppliers and the receipt of money from application services. Thus, it is possible to optimize working capital, avoiding excessive borrowing and paying interest to banks.

The calculation of the APP must be done in several stages and requires attention to details. The first step in calculating the APP is to identify payments to suppliers on your balance sheet. These amounts are recorded in the “current liabilities” section, which includes all the company’s shortterm obligations and debts (which must be paid within 12 months). The report is provided by your accountant and makes it much easier to collect data for the calculation.

Now, you need to calculate the average value of purchases made during the APP analysis period. For this, it is necessary to use a specific formula that considers the costs of acquisition of goods or products and the variation of stock: Purchases = Cost of services provided (CSP) + Final stock - Initial Stock. In this case, the CSP is the Cost of services provided.

With the amount paid to suppliers and average purchase value, you can now apply the official formula for the AFF: AFF = Suppliers / Purchases x 360. To analyze the APP, it is important to consider other essential average term indicators for the company. receipts and stock.

Average service receipt period or average collection period, indicates how long it takes the company to receive money after the service is completed. As many application services are made in installments, this value can change a lot according to the activities of each company. APP = Total pending receivables / Total Services / Days in the period.

The average inventory renewal period indicates how many days, on average, the products are stored in the company before being used. Thus, it indicates how long the stock takes to renew itself, using the following formula: Average Inventory Renewal Period = (Final Inventory - Initial Inventory) x Period Days / Average Cost of Service..

Now that you have learned how to calculate the APP and other similar indicators, it is important to know how to analyze this data to make decisions in your business. If you look only at the APP, you will not have much information about the company’s financial situation. Therefore, it is recommended to analyze the average term indicators together. By combining the three indicators we saw earlier, you can better assess the company’s financial cycle and define certain strategies.

As we have seen, the greater the distance between payment and receipt, the greater the need for company resources. Therefore, the lack of organization in the average payment and receipt periods directly affects the company’s financial health. The indicators most influenced by the APP are liquidity, profitability and indebtedness. Liquidity indicates the company’s ability to settle its obligations, while profitability shows its ability to generate profit and indebtedness reveals the degree of commitment of assets in relation to liabilities. With a complete analysis of the average term indicators, you can make an accurate financial diagnosis and understand the impact of these terms on other essential business KPIs.

Obviously, every company wants as long a term as possible to pay its suppliers, avoiding the need for loans to fulfill its obligations. At the other end, customers also want more and more time to pay for the service provided. Therefore, it is necessary to reach an agreement on payment terms that allows the company to better organize its cash flow and at the same time preserve a good relationship with partners. The most efficient way to monitor your average payment term and other financial indicators is through a digital management system.

With the right ag-aviation management platform, you can have access to a complete financial module with control of accounts payable and receivable, payroll, cash flow and several other functions. In an accounts section, you can apply filters by date, category and cost center, in addition to receiving notices whenever an expiration date is near. It is much easier to calculate the APP with a complete accounts payable history and a costs and payments report. Thus, you are able to renegotiate deadlines with suppliers, postpone commitments or request advance notice in order to improve the payment process.

Rafael Corrêa da Costa, Cuiabá Brazil, Bachelor of Aeronautical Science. Post-graduate degree in operational safety, 13 years experience as an executive and agricultural pilot. Ten years as an operational security manager for ANAC (Brazilian FAA). Rafael has served as flight coordinator and air operations manager, in addition to acting as a pilot, and managing six agricultural aviation companies with aeronautical advice. He is currently CEO of Agrofly Sistemas.