Average Ratios: Cash Period and Evolution

Posted on Mar 8, 2025 in Economy

Balance Sheet Data (MP)

  • (07) 25,700
  • (08) 28,800
  • (09) 27,900

Production in Progress

  • 26,400
  • 14,000
  • 19,700

Finished Goods

  • 28,500
  • 30,000
  • 36,500

Clients

  • 36,000
  • 28,000
  • 88,000

Suppliers

  • 21,700
  • 26,500
  • 40,640

Profit and Loss Data

  • Sales Revenue: 1,050,600 / 881,900 / 900,000
  • Raw Material Consumption: 624,800 / 435,700 / 462,540

Provisioning Period

Provisioning Period = (Average Balance of Raw Material Inventory / Raw Material Consumption) * 365

  • 2008 Provisioning Period: [((28,800 + 25,700) / 2) / 435,700] * 365 = 22.83 days
  • 2009 Provisioning Period: [((27,900 + 28,800) / 2) / 462,540] * 365 = 22.37 days

Manufacturing Period

Manufacturing Period = (Average Balance of Work in Progress / Production Costs) * 365

  • 2008 Manufacturing Period: [((14,000 + 26,400) / 2) / 613,000] * 365 = 12.03 days
  • 2009 Manufacturing Period: [((19,700 + 14,000) / 2) / 718,000] * 365 = 8.57 days

Sales Period

Sales Period = (Average Balance of Finished Goods / Cost of Goods Sold) * 365

  • 2008 Sales Period: [((30,000 + 28,500) / 2) / 623,900] * 365 = 17.11 days
  • 2009 Sales Period: [((36,500 + 30,000) / 2) / 705,800] * 365 = 17.20 days

Average Collection Period

Average Collection Period = 365 * [Average Customer Account Balance / (1 + VAT Rate)] / Sales Revenue

  • 2008 Average Collection Period: [(((28,000 + 36,000) / 2) / 1.16) / 881,900] * 365 = 11.42 days
  • 2009 Average Collection Period: [(((88,000 + 28,000) / 2) / 1.16) / 900,000] * 365 = 20.28 days

Average Payment Period

Average Payment Period = [(Average Supplier Account Balance / (1 + VAT Rate)) / Raw Material Purchases] * 365

To calculate raw material purchases, we use: Raw Material Consumption + Ending Raw Material Inventory – Beginning Raw Material Inventory.

  • 2008 Average Payment Period: [(((26,500 + 21,700) / 2) / 1.16) / (435,700 + 28,800 – 25,700)] * 365 = 17.28 days
  • 2009 Average Payment Period: [(((40,640 + 26,500) / 2) / 1.16) / (462,540 + 27,900 – 28,800)] * 365 = 22.88 days

Average Cash Period

Average Cash Period = Provisioning Period + Manufacturing Period + Sales Period + Collection Period – Payment Period

  • 2008 Average Cash Period: 22.83 + 12.03 + 17.11 + 11.42 – 17.28 = 46.10 days
  • 2009 Average Cash Period: 22.37 + 8.57 + 17.20 + 20.28 – 22.88 = 45.53 days

Analysis of Evolution

As can be seen, the Average Cash Period has remained virtually the same in both years. However, its composition has changed. The rotation of raw materials was practically identical, which means the company has maintained the same policy of purchasing and storage. The rotation of work in progress was reduced by 3.46 days, indicating that the production process has improved. The sales turnover also remains constant. The rotation of receivables, which is undoubtedly the most significant change, has increased by 8.86 days. This leads us to assume that the company has negotiated an increased deferment with customers in order not to lose sales, or that the company has done work for the public sector for which collection periods are more extensive, or simply increased the volume of bad debts. The rotation of payables, which has suffered a decrease of 5.60 days, indicates the company has improved its payment terms with suppliers. Given that the financial analysis completed through the balance sheet found cash problems in the company, it is possible that the increase in the average balance of suppliers is due to the organization’s problems in meeting payment deadlines.