November 2008
Beginner
448 pages
11h 33m
English
Content preview from Budgeting Basics and Beyond
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Chapter 17. Cash Budgeting and Forecasting Cash Flow: Two Pragmatic Methods
Aforecast of cash collections and potential write-offs of accounts receivable is essential in cash budgeting and in judging the appropriateness of current credit and discount policies. The critical step in making such a forecast is estimating the cash collection and bad debt percentages to be applied to sales or accounts receivable balances. This chapter discusses two pragmatic methods of estimating cash collection rates (or payment proportions) and illustrates how these rates are used for cash budgeting purposes.
The first approach involves a simple average. The second, empirically tested and improved by the author, offers a more pragmatic method of estimating collection and bad debt percentages by relating credit sales and collection data. This method employs regression analysis. By using these approaches, a manager should be able to
Estimate future cash collections from customers
Establish an allowance for bad debts
Provide a valuable insight into better methods of managing accounts receivable
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