Case Study: Projecting Cash Receipts

April 13, 2006

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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:

70 percent of the accounts receivable are collected in the month following the completion of the consultation
20 percent of the accounts receivable are collected in the second month following the consultation
10 percent of the accounts receivable are collected in the third month following the consultation

Using her accounts receivable collection pattern and her sales forecast, Linn can now complete her cash receipts projection for the first six months of 2004. (Note: the actual sales for October, November, and December of 2003 were $30,000.)

Vernon Consulting Service Cash Receipts Projection
	Jan. 2004	Feb. 2004	Mar. 2004	Apr. 2004	May 2004	June 2004
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