The sales forecast out of the way, the next job is to determine the cash receipts from these sales. For cash sales, cash is received at the time of the sale; for credit sales, the receipts come later. How much later depends on the billing terms, the type of customer, and the credit and collection policies of the firm. Pacific Jams Company offers terms of "net 30," meaning that payment is due within 30 days after the invoice date. Also assume that, in the company's experience, an average of 90 percent of receivables are collected one month from the date of sale and the remaining 10 percent are collected two months from sale date if no bad-debt losses occur. Moreover, on the average, 10 percent of total sales are cash sales.
If the sales forecasts are those shown in Frame We can compute a schedule of the expected sales receipts based on the foregoing assumptions. This schedule appears as Frame B. For January, we see that total sales are estimated to be $250,000, which $25,000 are cash sales. Of the $225,000 in credit sales, 90 percent, or $202,500, expected to be collected in February, and the remaining 10 percent, or $22,500, is expected u be collected in March. Similarly, collections in other months are estimated according to the same percentages. The firm should be ready, however, to change its assumptions with respec: to collections when there is an underlying shift in the payment habits of its customers.
From this example, it is easy to see the effect of a variation in sales on the magnitude and timing of cash receipts, all other things held constant. For most firms there is a degree of correlation between sales and collection experience. In times of recession and sales decline the average collection period is likely to lengthen, and bad-debt losses are likely to increase. Thus the collection experience of a firm may reinforce a decline in sales, magnifying the downward impact on total sales receipts.
Cash receipts may arise from the sale of assets, as well as from product sales. If Pacific Jams intends to sell $40,000 of fixed assets in February, total cash receipts that month would be $294,000. For the most part, the sale of assets is planned in advance and easily predicted for purposes of cash budgeting. In addition, cash receipts may arise from external financing as well as investment income.