What are expected cash collections?
Expected cash collections refer to the amount of money a business anticipates receiving from its customers over a certain period, based on outstanding invoices and sales made on credit.
This forecast helps businesses plan their financial operations, manage cash flow, and make informed decisions regarding investments, expenses, and debt management.
Expected cash collections are like a farmer's forecast for the upcoming harvest. Just as a farmer estimates how much crop they'll gather based on the seeds sown and the care given, a business predicts the money it will collect from its customers, based on sales made on credit and outstanding invoices. This projection is vital for planning—ensuring the business can sustain itself, invest wisely, and avoid financial droughts by managing its resources effectively.
Why are expected cash collections important?
Expected cash collections matter because they let businesses predict how much money they'll soon have. This foresight allows companies to make smart choices about spending, investing, and saving to keep running smoothly. By knowing the cash that's likely to come in, businesses can avoid running out of money and make sure they have enough for important expenses and opportunities to grow.
How to Calculate Expected Cash Collections?
Calculating the total expected cash collections for a business involves a systematic approach. Here's a step-by-step guide, followed by an example to illustrate the process:
Step-by-Step Instructions to Calculate Expected Cash Collections:
- Review Sales Forecast: Start by examining the sales forecast for the period you are interested in, which could be a month, a quarter, or a year.
- Separate Sales Types: Divide the forecasted sales into two categories: cash sales, which are expected to be collected immediately, and credit sales, which will be collected at a later date.
- Apply Credit Terms: For the credit sales, apply the company's standard credit terms to determine when the sales are expected to be collected. This might involve breaking down the collections by month based on historical patterns, such as a certain percentage collected in the first month, another percentage in the second month, and so on.
- Consider Outstanding Receivables: Add any outstanding accounts receivable from previous periods that are expected to be collected during the current period.
- Calculate Total Expected Collections: Sum up the immediate cash sales, the scheduled collections from credit sales based on the credit terms, and the collections on pre-existing receivables to get the total expected cash collections.
Example of Expected Cash Collections:
Imagine "TechGadgets," a company with the following forecasted sales for April:
- Total Sales: $100,000
- Cash Sales: $30,000 (collected immediately)
- Credit Sales: $70,000
TechGadgets' credit terms are 50% of credit sales collected in the month following the sale and the remaining 50% in the second month after the sale. Additionally, there are $20,000 in outstanding receivables from March expected to be collected in April.
Applying the Steps:
- Review Sales Forecast: $100,000 total sales for April.
- Separate Sales Types: $30,000 in cash sales; $70,000 in credit sales.
- Apply Credit Terms: Expect to collect $35,000 (50% of $70,000) in May and another $35,000 in June.
- Consider Outstanding Receivables: $20,000 expected to be collected in April from previous sales.
- Calculate Total Expected Collections for April: Immediate cash sales of $30,000 plus collections on pre-existing receivables of $20,000 equals $50,000 expected to be collected in April.
Through this methodical approach, TechGadgets can anticipate collecting a total of $50,000 in April, providing a clear picture of its cash flow for the month.
Predict Your Cash Inflows with Centime
Centime uses AI to improve cash flow forecasting and boost accounts receivable, helping teams know when and how much money they'll get. This clear view supports better financial decisions and planning. For more on how Centime does this, consider reading their detailed posts on AI's role in cash management and enhancing accounts receivable.