Managing Cash Flow

270 Planning Cash Flow
tively negotiate prices with its customers based on its internal cost structure and
cash availability (i.e. no paper invoices, accounts receivable, or need for collecting
reduces the company’s costs). These savings work to the advantage of the company
(lower costs of processing) and the customers (lower prices).
MORE CASH SALES—MORE CASH IN
MORE QUICKLY AND LESS CASH OUT.
An alternative to the specific analysis approach is to estimate the company’s
collection period in days, using a days’ sales outstanding (DSO) calculation.
Applying the DSO to projected sales allows an estimate of accounts receivable at
the end of each month of the budget period. Then by taking beginning accounts
receivable, adding projected sales and subtracting ending accounts receivable, the
amount of collections for the period can be determined. Adjustments, if required,
can be made for any potential uncollectible accounts. While somewhat less precise,
this method may be easier to implement if a consistent pattern of collection
is not discernable.
The development of a cash receipts schedule should also motivate company
management to question their sales and collection projections as follows:
• Are we making the right sales to the right customers?
• Are our payment terms too lenient or too stringent?
• Are our collection practices adequate to ensure maximum cash flow?
• Are our billing, accounts receivable, and collection procedures too costly
and inefficient?
• Is the amount of quick collections (at time of shipment or delivery, or
within the same month) too low?
• Is the amount of accounts receivable collections that extend beyond company
terms (e.g., net 30 days) too high?
Projecting Cash Disbursements
Cash disbursements generally fall into three major categories:
1. Payment for purchases (including inventory and fixed assets)
2. Payment for operating expenses (including manufacturing/service
expenses, payroll, and marketing/administrative expenses)
3. Payment for debt service (loan amortization and interest) and dividends
Normally, the business can project future expenditures with fairly reasonable
accuracy. Using the sales forecast as its starting point, the business makes
purchase and operating expense commitments to support the expected sales level
by period. The repayment of any debt is usually a known amount by period. An