Forecasting payments If a firm pays its bills with a 30-day delay, what fraction of its...

Question:

Forecasting payments

If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter?

What fraction of its purchases will be paid in the following quarter?

What if its payment delay is 60 days?

Cash collections schedule:

The cash budget is the forecasts for the cash flows in terms of receipts and payments for the company. The sales revenue is a major source of cash inflows and the schedules of cash collection from customers are based on credit terms and cash discount management.

a) The average credit period for purchases is 30 days and the number of days in a quarter is assumed as 90 days

The payment in a quarter will be as follows

• The opening accounts payables will be paid 100% as the collection period is less than the total number of days in the quarter
• The purchase amount of the quarter will be paid = (number of days in a quarter - average credit period/number of days in a quarter
= (90-30/90)
= 60/90
=0.66666666 or 66.66667%

The purchases will be paid for in the current quarter is 66.67%

The purchases will be paid in the following quarter is 33.33% (100% - 66.67%)

b) The average credit period for purchases is 60 days and the number of days in a quarter is assumed as 90 days

The payment in a quarter will be as follows

• The opening accounts payables will be collected 100% as the collection period is less than the total number of days in the quarter
• the purchase amount of the quarter will be collected = (number of days in a quarter - average credit period/number of days in a quarter
= (90-60/90)
= 30/90
=0.3333333 or 33.333333%

The purchases will be paid for in the current quarter is 33.33%

The purchases will be paid in the following quarter is 66.67% (100% - 33.33%)