Building a Cash Budget
Receipts
Why Forecast Receipts?
The broader field of cash flow forecasting is integral to ensuring organizational liquidity. Maintaining cash receipts over a given time frame enables organizations to have cash at hand in a predictable fashion, thus allowing them to reinvest in business operations to avoid the opportunity cost of having unused cash and cash receivables. Forecasting cash inflows and outflows in advance is a primary role of corporate financiers and accountants. It enables efficient use of existing assets to capture maximum competitive value in the marketplace.
Cash Receipts and Disbursements (R&D)
The direct method of projecting incoming cash flow is to understand the cash receipts and disbursements for the projected time period.
Receipts
Receipts generally refer to the collection of accounts receivable, which are the payments of paying customers over time. They also refer to the returns on short-term investments and the sale of various assets. Other potential incoming cash flows also fall under receipts, which are worth noting on a case-by-case basis.
Disbursements
On the inverse side of receipts, disbursements are outgoing cash flows during a short-term business operation. These can quite accurately project accounts payable, payroll costs, dividend payments, interest payments, and other short-term alterations to existing cash flow. By comparing receipts with disbursements, the overall available cash flow can be derived.
How to Forecast Receipts
As with all forecasting, shorter-term forecasts are more certain than longer-term forecasts (in general). Short-term forecasts can be quite accurate, as the various accounts receivable, accounts payable, short-term investments, and short-term costs are often relatively established (contractually and operationally). In shorter-term situations, most forecasting is done through implementing what is known with the probability that these obligations will be met.
With longer-term forecasting, it can be useful to consider past averages over time. Larger organizations can look at their average cash receipts over the past few years and couple that with growth trajectories to
project what level of cash inflow is likely over a given time frame.
It's important to remember that forecasts are only estimations, and
organizations should know the error margins involved.
Normal Distributions When creating a forecast utilizing past data, it is important
to recognize the degree of certainty that can be reasonably applied to
this forecast. By creating a normalized distribution and identifying
the percentage likelihood of a certain outcome, organizations can better
prepare for all likely outcomes.
Key Points
- Forecasting receipts is an important responsibility in corporate finance, as predicting cash on hand is critical in ensuring that organizations can invest their capital in a meaningful way.
- Receipts and disbursements are the two inputs of cash flow forecasting, particularly in the short term. Receipts include accounts receivable, interest on short-term investments, and the sale of assets.
- In the shorter term, predicting receipts is largely a process of compiling existing established contractual agreements. In the longer term, receipts can be predicted through understanding trends and growth over time.
Terms
- Disbursements – money paid out or spent.
- Receipts – potential sources of incoming cash over a given time frame.
Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/forecasting-financial-statements-4/building-a-cash-budget-52/index.html
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