Cash Flow Forecasts - Timing of Receipts

If cash is tight, or you are assessing the finance needed for your business, you'll want to avoid predictable cash crises. There's two things to remember for cash flow forecasting of cash receipts. These may sound obvious, but the implications are rarely appreciated:

(1) You need money in before you can make a payment. It's no use having money at the end of a month to pay what you are committed to pay earlier. You're really looking for money towards the beginning of a period to pay the expenses of that period.

(2) Cleared funds are needed before you can make payments such as direct debits, electronic payroll or by ebanking, and do not arise immediately:
      * at least 2 banking days for payments made by internet banking
      >   (unless done by same-day "Faster Payments")
      * at least 3 days for cheques (depneding on your bank)
      * up to 30 days for internet credit card sales
      * check your terms for offline credit card sales

      It's also worth regarding the delay in payees banking your        cheques as a bonus to help cover any delays in receipts.

Applying these principles to cash flow forecasting means:


If you expect to receive a large cheque at the end of week 3, would you forecast this in week 3, 4 or 5?

Receiving and banking it on say Friday in week 3 will clear later in the following week 4. Any slight delay will put it to the end of week 4. As it has to clear before any payments can be made from it, then it is more realistic to put it in week 5. Or later if delays are likely.


If you are selling items in June on 30 day terms, would you forecast the cash receipt in June, July, August or September?

Assuming sales are randomly placed through the month, then on average the monies should theoretically arrive throughout July. But in practice sales are often squashed into the end of a month, and many customers pay end of month plus 30 days, or with extended terms. Plus the clearance delay, most monies for June sales may not clear until at least mid-August, i.e. what appears to be an average of 60 days.

Furthermore, that may just be in time for the end-of-month payroll, but not earlier commitments such as PAYE payments and any weekly payrolls. Depending on your business, it may be worth modelling the effect of putting half if not all the June sales receipts in September.

You can then consider how receipts can be accelerated through deposits, invoice discounting, prompt payment discounts, and other techniques.


Forecasting in quarterly periods is best avoided unless cash levels are clearly not an issue.



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