What are some different ways to estimate cash flow?

I work in the accounting department at a large law firm. I have some ideas on how to estimate cash flow in the coming year, but would like more suggestions. One way I am already doing is an excel spreadsheet that will examine the aging on recievables from last year, and the amount uncollected. Then take those percentages of beginning A/R (ie: what % of Januarys recievables were collected in Jan, then Feb, then Mar, then written off) and apply them to projected billables for the coming year. Does anyone have any other good suggestions?

What are some different ways to estimate cash flow?
Lets assume you have all the information need on the receivables, cause you have the ongoing contract and the forecast on new customers and services coming from the marketing.


Calculate ratios like receivable days, turnovers and liquidity ratio.





In relation to the liabilites divide them in





Fixed running costs, salaries, rent, office running costs and other related, the forecast of the above its much easy, i suppose you have the timing of these payment during the month.





and





in variable costs, services received form third parts in relation to your sales.


To make an accurate forecast make an analysis of the previous tendece of these costs on sales.


Than based on the current service contracts and other forecasted for the future, ask this information to the management, take in consideration the terms of payments.





Make a comparison between the terms of payments in recevables and payables in the actual running contract and future contracts.


The same information compare with the previous tendece in the liabilities payments.


In case you notice a difference in decreasing payments gaps in the future use this, otherwise the previous tendece in order to be pesimistic to moderate in the forecast of the cash flows.





The percentage is not accurate in the liability side, try to make a more a forecast based on real contractual terms. its a hell of a work but it worths in relation to the accuracy of the future information.


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Reply:You know, one thing (depending on how your business thinks) to take into consideration is the present value of a recievable as it changes as it gets older. If you know your cost of capital you can get a truer idea, based on the economy, of what things are worth. If you have accounts that you don't think will pay it may be worth factoring out those recievables. Since recievables tie up cash you have to consider these issues when looking at cash flow. As my accounting profs used to say , pay as little as possible as late as possible taking into account what the real cost will be when a bill is payed. You can renegotiate with your own vendors to improve cash flow by, for example, asking for 45, 60 or 90 days to pay ~ OR, take advantage of discounts when they are higher than your cost of capital. My last comment is to look at historical cash flows and use them to predict future cash flows (a great way to figure out what you really need). There are books that talk a great deal about cash flow because it can be incredibly complex - you might want to hit your local store.
Reply:Easiest is to just take the average time between billing and receiving. See if it is weighted by the dollar amount of the invoices. Of course tracking it is one thing. Improving it is another. Discounts if paid in a certain time generally will speed it up.
Reply:Well seasonality is what you are using. But if you lived in let's say New Orleans, in September 2005 then that method would not work.





A better way is to group according to lates. That is 30 day late. The receiables 60, 90 and charged-off.


What is your historical record for these?


Also you would be surprised that if you just send letters with return envelopes, pre-paid that you'll get some 90 days to pay.


Just ask. Offer a payment plan on lates.


Once you see what the percentage is paying this is your baseline.





Finally, don't forget the opposite. Do what other trade suppliers do. They offer a discount if paid within 10 days, 30 days, etc.





I hope this helps you.





Good luck
Reply:Something else that is useful to consider would be projected growth. If your firm is anticipating significant growth (or retraction), you should definitely consider that in making your projections, because the receivables from this year would not be a reasonable measure in that instance. Has anyone there prepared a budget for the upcoming year, of anticipated growth?
Reply:Past accounting measured is the best predictor of future flow. Chart the last couple of years in your matrix and show allowances for bad debt. This should give you a strong prediction of future flow. Adjust current cash flow prediction with percentage of increase/decrease of foreseeable earnings. If your company anticipates an increase of overall earnings of 10%, adjust flow to less than but not equal to the increase.
Reply:There are a variety of ways to estimate cash flows for the coming year involving MS Excel. Unfortunately, you need to calculate your P%26amp;L (profit and loss) for the upcoming year first. This can be tricky. A very quick way is to assume that net income will either be the same as this year, or adjust it based on another assumption, say 3% (inflation). Next, you need to make certain adjustments to net income to determine cash flows. For example, do you expect A/R (Accounts Receivable) balances to remain the same from year to year? If you think that you can reduce your year ending A/R balance $1000 lower than your A/R balance is it will be at 12/31/06, then you have collected or "increased" cash flow by $1000, and this would be an adjustment TO net income. Same with A/P (Accounts Payable). If your A/P balance at 12/31/07 is $1000 higher than it was on 12/31/06, that means you HAVEN'T paid $1000 more at 12/31/07 than you did at 12/31/06, so again, this would be an adjustment TO net income (increases cash flow). Now do the same for F/A (fixed assets, things such as furniture, computers, vehicles - things that were NOT expensed when they were purchased), prepaid expenses, deposits, unearned revenue... (yeah yeah, I know, get's complicated)... really, you need to do the same for any account balance found on your balance sheet. Law firms do not typically have muchin the way of depreciation, so all you accountants out there, don't get in a huff because I omitted the depreciation side of this - we are trying to do this in a paragraph!


Now the last part. This is how you put a bow on it and present to your boss and you will need an estimation of cash at 12/31/06, probably based on the 11/30/06 G/L balance?....


cash 12/31/06 XXX


cash 12/31/07 XXX


increase cash XXX





Do you have access to the 10/31/06 balance sheet? If so, you can grab it. It will probably have the prior period onthere as well so you can practice.


Use this format:





Net income 2007 XXX





Increase/decreases in:


A/R XXX


A/P XXX


F/A XXX


(the rest) XXX


Cash flows from operations XXX





Cash at 12/31/06 XXX


Cash at 12/31/07 XXX


Increase / decrease in cash at 12/31/07 XXX





This is a horrible attempt at explaining a statement of cash flows to you while shoveling raisan bran in my face during breakfast and on the way to work... kiddo, hope this helps. Tell you what, if you want, you can email me and maybe I can do a better job, if you want? Good luck.
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