The following are some examples of sources of cash from operating activities, and some considerations to be taken into account in forecasting them:
Cash sales. How much of a business’s revenue comes from cash sales will depend on the nature of the business. Forecasts may be based on historical experience, and by applying the ratio of cash sales to total sales in the past, and applying this ratio to budgeted sales for the period, you can forecast cash sales for the period. Any changes in terms and conditions of sales would need to be taken into consideration.
Collections on accounts receivable. The accounts receivable aging report will provide information on when accounts come due. Using this data, you can forecast cash flow from collections. This estimate may need to be adjusted based on historical experience regarding certain customers’ payment records, (some customers may consistently pay either before or after the due date), and it may be necessary to factor in an allowance for doubtful accounts.
Rent. If your business involves rent income, you may receive the majority of your cash flow on certain days of the month.
Progress payments on projects, and contractual payments. If you have documentation, such as a contract or agreement, that stipulates when payments are to be made, this will be a source of information for forecasting cash receipts.
You may have cash receipts from installment sales that you can forecast based on a payment schedule included in a sales agreement, or you may receive advance payments on products to be delivered or work to be performed.
Cash receipts from investing activities include dividend and interest payments, and sales or redemptions of short-term or long-term investments in marketable securities, deposits, stocks, bonds, and other instruments.
Certain financing activities may already be defined at the time of preparing a cash flow forecast. These cash receipts from financing activities could include the proceeds from a loan that has already been approved, for example. But you may find that as you do the cash flow forecast, there is a need for additional financing to cover cash deficits in the operation. The cash flow forecasting exercise in itself may therefore generate items that need to be incorporated into the cash flow forecast as sources of cash from financing activities. These could include:
Proceeds from loans.
Amounts drawn from revolving lines of credit or other facilities.
Capital contributions made by the owner of a sole proprietor or by partners in a partnership.
Proceeds from the issuance of bonds or stock, in a corporation.