Forecasting The Receipt
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FORECASTING THE RECEIPT
The preparation of cash budget (as per receipt and payments methods) requires forecast of different receipt by the firm during each of interim period.
1.) Sales based receipt:
The sales budget constitute the foundation open the entire budget program of the firm is developed. An accurate sales budget is the product of careful forecast of sales, usually prepared by several methods to ensure that all factors affecting the firm’s sale have been considered. The sales forecast should be compared with the production capacity of the firm to see whether the predicted unit sale are within the ability of the firm to produce. Finally , all the forecast are brought together to determine whether there is a consensus. If there is difference then it must be reconciled. Once this has been done the financial manager can begin the process of constructing the cash budget from the collection of predicted sales.
At this stage , it is necessary , first, to separate cash sales from credit sales and then to analyze the credit sales for the purpose of determining the time lag between sales and collection. Particular care must be taken of the effect of seasonal variation and of general business conditions on the collections and on the length of the collection period. Second, other factors affecting the firm’s collection must also be taken into account. Fro example, the returns and allowances must be estimated , particularly if cash refund is to be made. The amount of cash discount that the customer are likely to take should also be estimated. The effect of any planned changes in either the credit policy or the collection policy must also be taken into account.
At this stage , it is necessary , first, to separate cash sales from credit sales and then to analyze the credit sales for the purpose of determining the time lag between sales and collection. Particular care must be taken of the effect of seasonal variation and of general business conditions on the collections and on the length of the collection period. Second, other factors affecting the firm’s collection must also be taken into account. Fro example, the returns and allowances must be estimated , particularly if cash refund is to be made. The amount of cash discount that the customer are likely to take should also be estimated. The effect of any planned changes in either the credit policy or the collection policy must also be taken into account.
2.) Other receipt:
Most of the business firm may receive cash during the course of their operations from sources other than the sales of their products & services .These receipt may be of smaller magnitude when compared to the sales receipt yet must be included in the cash budget. These cash inflows may include income from property, interest and dividends from investments, sale of assets and investments etc. Such receipts generally do not pose much problem in forecasting, because they are of small magnitude and specific. These items have only a minor impact on the overall cash budget.
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