How to Calculate Budgeted Accounts Receivable
Budgeting is an essential aspect of financial management for any business. One critical component of budgeting is the estimation of accounts receivable. Accounts receivable represent the money that a company expects to receive from its customers for goods or services sold on credit. Accurately calculating budgeted accounts receivable is crucial for businesses to manage their cash flow effectively and make informed financial decisions. In this article, we will discuss the steps and factors to consider when calculating budgeted accounts receivable.
Understanding the Basics
Before diving into the calculation process, it is important to have a clear understanding of what accounts receivable are. Accounts receivable are recorded as assets on a company’s balance sheet and are typically categorized as current assets. They represent the amount of money that customers owe to the business for products or services provided on credit.
Factors to Consider
Several factors should be taken into account when calculating budgeted accounts receivable:
1. Historical Data: Analyze past sales and payment patterns to identify trends and patterns in accounts receivable.
2. Credit Terms: Understand the credit terms offered to customers, such as the payment period and any discounts for early payment.
3. Industry Standards: Research industry benchmarks to determine what a reasonable budgeted accounts receivable percentage might be for your specific business.
4. Economic Conditions: Consider the overall economic climate, as it can impact customer payment behavior.
Steps to Calculate Budgeted Accounts Receivable
Now that we have a grasp of the basics and factors to consider, let’s explore the steps to calculate budgeted accounts receivable:
1. Estimate Sales: Begin by estimating the total sales for the budgeted period. This can be based on historical data, market research, or sales forecasts.
2. Determine Credit Sales: Identify the portion of sales made on credit. This can be calculated by subtracting cash sales from total sales.
3. Apply Credit Terms: Multiply the credit sales by the percentage of customers who typically take advantage of the credit terms. For example, if 80% of customers take advantage of credit terms, multiply the credit sales by 0.8.
4. Consider Aging of Receivables: Estimate the percentage of receivables that may become uncollectible due to late payments or defaults. This can be based on historical data or industry benchmarks.
5. Calculate Allowance for Doubtful Accounts: Multiply the estimated uncollectible percentage by the total credit sales to determine the allowance for doubtful accounts.
6. Subtract Allowance for Doubtful Accounts: Subtract the allowance for doubtful accounts from the total credit sales to arrive at the budgeted accounts receivable.
Conclusion
Calculating budgeted accounts receivable is a vital step in managing a company’s financial health. By following these steps and considering the relevant factors, businesses can make more informed decisions regarding credit terms, collections, and financial planning. Accurate budgeting of accounts receivable can lead to improved cash flow, reduced financial risk, and a stronger overall financial position.
