What about next quarter?
If you don’t already know the answer, this article is for you.
In this series of “Cash Forecasting Basics” we’re taking a look at a few of the key steps to budgeting (aka projecting or forecasting) your company’s cash needs.
Arriving at an accurate cash budget requires the following main components:
1. Forecasting the collection of current accounts receivable.
2. Forecasting the payment of accounts payables.
3. Forecasting the payment of payroll, expenses, capital payments, etc.
Today, we’ll focus on the first item, projecting accounts receivable collection. (Click here for the first post on “Why a Cash Budget is Important and What It Should Look Like“)
Projecting receivables collection is sometimes met with resistance. A common reaction to the task is that it’s too difficult to accurately predict when you will get paid, because your customers are too unpredictable. While individual collections can be unpredictable, you certainly can rely on averages.
The averages you need to look at are both at the client level and at the macro company level. For example, look at Client A’s payment history and if a trend emerges, use that as your basis for projecting. If not, you can still use the average.
Another way to deal with this is to simply use the company’s “average days sales outstanding.” This is a term to describe the amount of time, on average, it takes for your receivables to be paid. It is typically expressed as (Accounts Receivable / Total Sales) * Number of Days. Using this measure, you might find that your average days to collect is 60. Thus, you could use this average to project receivables collections.
With these two methods at your disposal, there is really no reason your company should not have updated projections that show how much is anticipated to be collected during a given week. But your work isn’t quite finished.
You also need to take a look at your projected revenue over the next few months, and determine if any of this will result in collections that need to be accounted for in your cash projections. For example, do you have work coming up in a month for which you anticipate a down payment? Or, if you have a fast cycle between billing and cash, you will certainly need to project your normal collections pattern against your projected billings for the period.
Adding these collections from projected billings to the projections you already assembled will give you your complete forecast for accounts receivable.
Why should you be doing this?
The simple answer: Without forecasting your collections, payments, inflows, outflows, and all cash related accounts, you don’t really have a handle on your cash flow. By staying on top of your cash projections, you can keep your sanity and understand where your business is headed financially.
To learn how to effectively manage and get your cash flow under control in your business, download our FREE system Cash Flow Clarity.
In the next installment, we’ll take a look at the next step, projecting the payment of accounts payable.