cash collections might look as follows:
The following example illustrates how cash collection rates are used to generate a forecast of the cash collection porting of the cash budget.
Example 2
The following data are given for Sharpe’s Clothing Store:
Past experience based on the aging of accounts receivable indicates that collections normally occur in the following pattern:
The total cash receipts for November and December are computed as follows:
| November | December | |
| Cash receipts | ||
| Cash sales | $ 8,000 | $ 6,000 |
| Cash collections | ||
| September sales | ||
| $50,000 × 19% | 9,500 | |
| October sales | ||
| $48,000 × 80% | 38,400 | |
| $48,000 × 19% | 9,120 | |
| November sales | ||
| $62,000 × 80% | 49,600 | |
| Total cash receipts | $55,900 | $64,720 |
How is it used and applied?
The forecasting of cash collections is important in predicting whether sufficient cash will be available to meet expenditure needs. Further, the more quickly cash is received from customers, the less is the risk of noncollection. In addition, a return can be earned on the cash received early.
13. “What-if” Analysis
Introduction
Managers make decisions in the fact of uncertainty or risk. The environments in which they operate are subject to change without notice. It is therefore advisable to set up “what-if: scenarios and analyze them with the aid of computer software.
How is it computed?
Many “what-if” scenarios can be evaluated using the concepts of contribution margin as a tool for profit planning. Contribution margin is the difference between sales and the variable cost of a product or service; it is the amount of money available to cover fixed costs and generate profits.
Example 1
To illustrate a ‘what-if: analysis, consider the following data for the Allison Toy Store:
Let us suppose that, in an effort to stimulate sales, the owner is considering cutting the unit price by $5 and increasing the advertising budget by $1000. If these two steps be taken? To answer the question, you may construct a proposed income statement as follows:
The answer is yes, since these two steps will increase net income by $500.
Example 2
Delta Gamma Manufacturing wishes to prepare a 3-year projection on net income using the following information:
1.20×8 base-year amounts are as follows:
| Sales revenues | $4,500,000 |
| Cost of sales | 2,900,000 |
| Selling and administrative expenses | 800,000 |
| Net income before taxes | 800,000 |
2.Using the following “what-if: assumptions:
Figure 13.1 shows a spreadsheet for the pro forma income statement for the next 3 years. Using a spreadsheet program such as Excel allows managers to evaluate various “what-if” scenarios.
Figure 13.1: Delta Gamma Manufactures: three-year income projections (20×8-20×11)
Can a Computer Help?
Performing “what-if: analyses without the aid of a computer is almost impossible. “What-if” software includes:
1.Spreadsheet programs such as: Lotus 1-2-3, Microsoft’s Excel, and Quattro Pro.
2.Cash management and accounting software such as Quicken and Up Your Cash Flow.
3.Decision-support and budgeting software such as: Adaptive Planning, ®Risk, and BudgetMaestro.
How is it used and applied?
The
