Part 6  -  Determine Your Forecasted Accounts Receivable

An account receivable is a "promise" made by a customer to pay for products or services at a later point in time. Many of us have purchased items on credit, promising to pay for them in the future. Companies offer credit terms as an added service to customers, in an attempt to increase sales. When you, as a consumer, purchase something on credit, the company you purchase the product or service from will consider you an account receivable. If you, as a business owner, allow customers to buy your products on credit, then those customers are considered accounts receivable.

Your task is to forecast the amount of money customers will owe you at the END of each forecasted business year. In our example, Murray's task is to forecast the amount of money customers will owe him on December 31, 200X, and on December 31, 200Y (IE the end of each forecasted business year).

As you might suspect, customers will not owe Murray any money in any month or in any year, since he requires customers to pay him in advance (IE he offers no credit terms to his customers). As a result, Murray's Accounts Receivable on December 31, 200X and on December 31, 200Y will be ZERO. Therefore, his 200X and 200Y Forecasted Balance Sheet will show a ZERO amount in his Accounts Receivable. (Please Note: Accounts Receivable are considered Assets and appear under the Current Assets section of the Balance Sheet).

If your company plans to offer credit to customers, you will need to use the following formula to determine your Forecasted Ending Accounts Receivable.

Lets use the above formula to prove that Murray's accounts receivable for December 31, 200X is ZERO. As the formula implies, we need three pieces of information - Murray's total forecasted sales for 200X, the total cash he expects to collect during 200X from customers, and the amount customers owed him at the end of the previous year, namely 200W (IE year 200W).  The first two pieces of information have already been calculated in Part 5 of this budget entitled, "Determining When Customers Will Pay You". Below summarizes these calculations.

As you can see, Murray's total forecasted sales for 200X are expected to be $104,000. In addition, Murray's total forecasted cash collections from customers during 200X is expected to be $104,000. Once again, these numbers were taking from Part 5 of this Budget entitled, "Determining When Customers Will Pay You".

The final piece of information needed in order to determine Murray's Forecasted Ending Accounts Receivable is the amount his customers owed him at the end of  200W. Since Murray's first month of operation is scheduled for July of 200X, he would not have had any customers in 200W and therefore, customers would not have owed him any money at the end of 200W.

Now Murray can use the formula to calculate his forecasted accounts receivable for December 31, 200X (IE Ending Accounts Receivable).

A1s stated earlier and as indicated above, customers will not owe Murray any money on December 31, 200X, or at any other time during the year, due to his credit granting policy of 0 days. Now lets use the formula to calculate his Forecasted Accounts Receivable for December 31, 200Y.

Once again, Murray will need three pieces of information before he can calculate his forecasted accounts receivable on December 31, 200Y - 1) his total forecasted sales for 200Y, 2 )his total forecasted cash to be collected during 200Y, and the amount customers owed him at the end of 200X. The first two pieces of information have already been calculated in Part 5 of this Budget entitled, "Determining When Customers Will Pay You". Below summarizes these calculations:

As you can see, Murray's total forecasted sales for 200Y are expected to be $192,000. In addition, Murray's total forecasted cash collection from customer during 200Y is expected to be $192,000. Once again, these numbers were taking from Part 5 of this Budget entitled, "Determining When Customers Will Pay You".

The final piece of information needed in order to determine Murray's Forecasted Ending Accounts Receivable is the amount his customers owed him at the end of 200X. Recall from above, Murray forecasted his Accounts Receivable on December 31, 200X will be ZERO ($0.00).

Now Murray can use the formula to calculate his Forecasted Accounts Receivable for December 31, 200Y.

As you can see, Murray's Accounts Receivable on December 31, 200Y is forecasted to be Zero. In other words, Murray's customers will not owe him any money on December 31, 200Y. Therefore, NO Accounts Receivable ($0.00) will appear on his December 31, 200Y Forecasted Balance Sheet under the "Current Assets" section.