Question

As you would expect, all of those expense budgets (direct materials, direct labor, etc.) will have an impact on our cash disbursements.

Likewise, our sales budget will determine our cash receipts budget. This is also called our cash collections budget.

However, there are a couple of other consideration in our cash receipts. First, what percentage of our sales are cash sales and what percentage of our sales are sold on accounts receivable. Secondly, for those sales on accounts receivable, what is our historic collection pattern? This is, what percentage of our credit sales are paid within 30 days from the invoice date, what percentage is paid between 31 days and 60 days, what percentage is paid between 61 days and 90 days, and what percentage is paid after 90 days?

This is the aging of accounts receivable, a topic that we study in Financial Accounting in the chapter on Accounts Receivable.

As we can see, we might have a sale in February, but not get paid for it (cash received) until June. So for credit sales, we see a lag time between the month of sale and the receipt of cash.

For the purpose of a cash receipts budget, we are not primarily thinking terms of sales in a month, but we see the amount of cash received in a month comes from multiple months. That cash received will come from sales in various months.

As an example, let’s assume sales are as follows:

October 2010       - 75,000

November 2010   - 90,000

December 2010 - 100,000

January 2011    -    90,000

February  2011 -   100,000

March - 2011   -   110,000

April   - 2011    -    120,000

May  - 2011      - 130,000

Let’s further assume as we look to project cash receipts for May that cash sales are 10% of total sales for each month.   And we expect the following aging pattern to remain constant for credit sales;

Invoices Paid Within 30 day                               75%

Invoices Paid Between 31 and 60 days               15%

Invoices Paid Between 61 and 90 days               7%

Invoices Paid Between 91 and 120 days             3%

With all of this, what is our forecast of cash receipts expected in May? First, let’s identify the sources of cash for May, that is, from what sales will the cash be received.

First, we will have cash sale in May, which are 10% of May total sales.

Next, we will have 75% of April credit sales,

Then, we will have 15% of March credit sales.

Then we will have 7% of February credit sales.

And lastly, we have 3% of January credit sales.

Yes, that is a lot of calculations just to find one month’s cash receipts, but that the process we go through.

So now let’s put some numbers to it for the forecasted May cash receipts.

13,000            May cash sales – 10% of $130,000.

81,000            April credit sales ($120,000 x 90%) x 75%

14,850            March credit sales ($110,000 x 90%) x 15%

6,300              February credit sales ($100,000 x 90%) x 7%

2,430              January credit sales ($90,000 x 90%) x 3%

So our total budgeted cash receipts for May are $117,580. Please note that is this problem, we have five sources of cash receipts in May. Or another way to say it, sales from 5 different months are paid for in May. Also please note that the number of sources (months) you have in a problem will be based on the AR aging historical schedule given to you in the problem.

We need to do this for each month in the year to forecast if we will have enough cash on hand to cover our cash disbursements. When we combine the cash receipts budget with the cash disbursements budget, we then cash see predicted cash shortages. When we see a predicted cash shortage, it is our job. It is our job to locate additional funds to cover the cash shortage.

You can expect a cash receipts budgeting problem on the next exam. So get help you ready for it, you will find in Module 3 a file labelled “Ch09 – Cash Collections Practice Prob Master 2016-11.xlsx” This is an Excel file. Please use your Excel skills to complete it, or you can print it off and do it by hand.

Answer 1

Shedule of Cash collections are calculated below

Shedule of Expected Cash Collections
	October	November	December	January	February	March	April	May
Total Sales	75000	90000	100000	90000	100000	110000	120000	130000
Cash sales	7500	9000	10000	9000	10000	11000	12000	13000
Credit sales	67500	81000	90000	81000	90000	99000	108000	117000
Credit Collections
October sales		50625	10125	4725	2025
November sales			60750	12150	5670	2430
December Sales				67500	13500	6300	2700
January Sales					60750	12150	5670	2430
February Sales						67500	13500	6300
March Sales							74250	14850
April sales								81000
Total credit collections	0	50625	70875	84375	81945	88380	96120	104580
Total Cash collected	7500	59625	80875	93375	91945	99380	108120	117580