Case Study Projecting Cash Receipts

Applying your accounts receivable collection pattern from the past to your sales forecast is the best way to predict your cash receipts from the collection of accounts receivable. The following example shows how to use your accounts receivable collection pattern to project future cash receipts:

Linn Vernon is a financial planning consultant to small businesses. Linn receives 20 percent down when a consulting agreement is signed. The customer is billed for the remainder after the job is completed. Linn's credit terms are Net 30 (the full amount due within 30 days). Relying on her experience with accounts receivable collections from the past, she assumes the following when projecting her cash receipts for her cash flow budget:

Using her accounts receivable collection pattern and her sales forecast, Linn can now complete her cash receipts projection for the first six months of 2001. (Note: the actual sales for October, November, and December of 2000 were $30,000.)

 
Vernon Consulting Service
Cash Receipts Projection

Jan.
2001
Feb.
2001
Mar.
2001
Apr.
2001
May
2001
June
2001
Forecasted Sales $30,000 $35,000 $40,000 $50,000 $40,000 $30,000
10% down 3,000 3,500 4,000 5,000 4,000 3,000
70% 1st month 18,900 18,900 22,050 25,200 31,500 25,200
20% 2nd month 5,400 5,400 5,400 6,300 7,200 9,000
10% 3rd month 2,700 2,700 2,700 2,700 3,150 3,600
Total receipts $30,000 $30,500 $34,150 $39,200 $45,850 $40,800