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Forecasting Cash Inflows; Cash Forecasting; Collections Forecasting
Cash forecasting usually involves an estimate of the timing and amount of cash inflows and outflows over a specific period of time. The credit department may be in the best position to forecast cash inflow rather than simply to monitor cash inflows. Some companies actually delegate forecasting cash inflows to the credit department because in many companies the collection of accounts receivable is the largest source of cash inflows for the company.
Unfortunately, a model that can effectively forecast cash inflows is difficult to develop. Many cash forecasts do not provide information that is reliable enough for companies to use with any degree of confidence. Over the years, many different cash forecasting techniques have been used and many have been abandoned. Experienced credit professionals recognize that the only effective way to forecast cash inflows is to develop an accurate model for doing so.
Here is an example of a relatively simple cash forecasting model:
- Track daily sales activity,
- Determine the average days to pay for the company as a whole,
- Based on these two pieces of information, determine the likely amounts to be received each day.
- Interest rates,
- The manner in which the seller contacts customers about delinquent balances,
- Terms of sale,
- Inflation rates,
- The amount of risk the seller is willing to accept in extending open account credit terms,
- Whether or not the seller offers a cash discount, and if so how large a discount,
- General economic conditions,
- The day of the week, the week of the month, and the month of the year.
More sophisticated models take into account a wide variety of factors and are able to measure one factor against another in determining how much each factor independently influences collections, and how factors interact with one another to influence collections.
© 2011. Michael C. Dennis. All Rights Reserved. Michael Dennis is a business credit consultant, speaker, lecturer, teacher and the author. He can be reached by email at mcdennis13@yahoo.com
Edited by Michael Zininberg