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Chapter 16: Cash is King - Page 16.4

Cash From Receivables

  1. The second row, "Cash from Receivables," is an estimate of the dollar amount received from customers as payments of accounts receivable. This is critical to your cash flow. Estimating money from receivables is vital. You should estimate receivables using assumptions nimble enough to offer a useful estimate, but simple enough to manage. For example, in the sample case illustration here, we use estimated collection days to calculate amounts received as a manner of estimating the time that passed between making the sale and receiving the payment.
    Sample Case Receivables Detail

    The collection days estimator sets the amounts received. (Amounts shown in thousands. Numbers may be affected by rounding.)

    The calculation in the Receivables Detail example on the previous page is relatively simple. You can see how each month starts with beginning balance, adds new sales on credit, subtracts money received, and then calculates ending balance. Notice that the amounts received in March are the same as the sales on credit for January (shown in the Starting Income Statement illustration on page 16.2) because the collection days estimator is set to 60 days.

    To emphasize the importance of collection days as an estimator, look at the following example with the same logic, but set to 90 days instead of 60 days. In this case sales on credit from January are received a month later, in April:

    Importance of Collections

    In this second view, when collection days are stretched, less cash comes in from receivables. The difference affects cash flow. (Amounts shown in thousands. Numbers may be affected by rounding.)

    This simple change turns acceptable cash flow into cash problems (see the discussion on Collection Days in Financial Analysis: About Business Numbers).


Copyright © Timothy J. Berry, 2006. All rights reserved.