The budgeted accounts receivable balance communicates several things to management. This balance communicates the expected level of credit sales the company expects to make. As the balance of budgeted accounts receivable increases, the company’s expectation of credit sales increases. It also communicates the level of collections the company expects to experience. If the budgeted accounts receivable balance decreases, the company expects to collect more from its customers. The budgeted accounts receivable balance contributes to the total assets appearing on a budgeted balance sheet.
Read the actual balance sheet for the end of the current year. Locate the accounts receivable balance. This represents the beginning accounts receivable balance for the budget period.
Read the sales budget. Write down the total budgeted sales for the year.
Read the cash budget. Identify the total payments received for cash sales.
Read the cash budget. Identify the total payments received on customer accounts.
Write down the beginning accounts receivable balance for the budget period. Add the total budgeted sales. Subtract the payments received for cash sales and the payments received on customer accounts. This calculates the accounts receivable to include on the budgeted balance sheet.
Compare the budgeted accounts receivable balance to the actual balance over a several year period. If the budgeted balance represents a significant change from previous years, verify that the information used to calculate that balance was accurate.
Review the length of time your accounts receivable remain open. Longer credit terms make the company more competitive, but also increase the risk of customers defaulting on their accounts.
Accounts receivable represent one aspect of the company’s financial position. Consider the balances of all accounts on the balance sheet when analyzing the company’s financial position.
Do not rely on the budgeted accounts receivable balance to predict the actual amount. The budgeted accounts receivable balance only represents the expected level of accounts receivable. The actual accounts receivable balance depends on a variety of factors. A sales manager who embraces a more lenient credit policy may see an increase in this balance. Economic factors, such as increasing bankruptcies among the company’s customer base may lead to longer payback periods for customers who owe balances.