Understanding budgeted cash collections is an important component of a company's overall cash budget. Cash collections usually come from one of two places: cash sales and collections on accounts receivable. Use historical data and trends to estimate collections for each category and calculate the sum of the figures to find total budgeted cash collections.
Estimate cash collections
- Year-over-year annual sales trends
- Last year's sales for the accounting period in question.
- The percentage of sales that are usually paid in cash rather than on account.
To project cash collections from sales, adjust the sales revenue from last year based on this year's trends. For example, say that you're trying to project collections from cash sales for February. Around 10 percent of sales are usually cash sales, sales revenue is up 20 percent from last year and the company earned $5,000 in sales revenue last year.
Because sales are up 20 percent, projected sales revenue for February is $5,000 multiplied by 1.2, or $6,000. Projected cash sales are $6,000 multiplied by the 10 percent cash sales rate, or $600.
Estimate cash collections from sales made on account. To do this, you must understand when cash is usually collected from accounts receivable. Specifically, you need to know:
- The percentage of receivables usually collected within 30 days.
- The percentage of receivables usually collected within 60 to 90 days.
- The percentage of receivables collected within 90 to 120 days.
- A schedule of outstanding receivables
To budget cash collections from accounts receivable, multiply the rate of collection by the receivable balance for each age bracket.
For example, say that you have $5,000 worth of receivables that are less than 30 days old, $5,000 in receivables that are between 60 and 90 days old and $5,000 worth of receivables that are 90 to 120 days old. Also assume that the company collects 50 percent of receivables within 60 days, 30 percent within 60 to 90 days and 10 percent within 90 to 120 days.
Budgeted collections from the 30-day receivable group are $5,000 multiplied by 0.6, or $3,000. Collections from the 60 to 90 group should be $5,000 multiplied by 0.3, or $1,500. Collections from the 90 to 120 group should be $5,000 multiplied by .1, or $500.
Calculate the sum of the budgeted cash collections from each revenue group to determine total budgeted cash collections for the period. In this example, budgeted cash collections for the period are:
- $600 for cash sales.
- $3,000 for receivables less than 30 days old.
- $1,500 for 60 to 90 day old receivables.
- $500 for 90 to 120 day old receivables.
This gives a total budgeted cash collection of $5,600.