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Cash Forecasting in the Credit Department
By Michael C. Dennis, MBA, CBF

Some companies delegate cash forecasting to the credit manager reasoning that they are in the best position to know if and when payments from customers can be expected. Developing a model that can effectively forecast cash inflows is extremely difficult. Over the years, different cash forecasting techniques have been tried and abandoned.

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 the
    whole, and

  • Based on these two pieces of information, calculate the
    likely dollar amount of payments to be received each day.

This simple method of cash forecasting fails to take into account a variety of factors that influence cash inflows including:

  • Whether or not the seller offers a cash discount, and if so how large a discount

  • The effectiveness [or lack of effectiveness] of the seller's collection efforts

  • The impact that extended terms of sale [when offered] will have on collections

  • Any changes in credit granting policies, and any changes in the amount of risk the seller is willing to accept when offering open account terms

  • Changes in interest rates and inflation rates, or in the general economic conditions

  • Timing...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.

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