18: Cash Conversion, Inventory and Receivables ManagementTABLE 18.6 FORECAST COLLECTIONS FOR EUCLA MANUFACTURING USING PAYMENT-PATTERN MONITORINGForecast collections for Eucla Manufacturing
Sales forecast ($) January February March April May
January: 200,000 $20,000 $120,000 $ 60,000
February: 150,000 15,000 90,000 $ 45,000
March: 300,000 30,000 180,000 $ 90,000
April: 400,000 40,000 240,000
May: 250,000 25,000
Total projected collections for cash budget: $180,000 $265,000 $355,000
Notes: This table is created under the assumption that the company collects 10% of each month’s sales in the month of sale, 60% in the month following
sale and the remaining 30% in the second month following sale. The first column provides forecast sales for each month; the remaining columns total up
the actual cash flows for each month. In a real-life application, the remaining collections from the prior year’s last quarter would be included to complete
the projected cash flows in January and February.18-5c CASH APPLICATION
Cash application is the process through which a customer’s payment is posted to its account and the
outstanding invoices are cleared as paid. In most business-to-business environments, the typical
application method is known as open item. In this approach, the company records each customer invoice
in the A/R journal and later matches received payments to the invoices in order to clear them. This
task is complicated by the usual practice of paying multiple invoices with a single cheque. Ideally, the
remittance information accompanying the cheque should clearly indicate any adjustments, discounts or
allowances taken related to each invoice in that remittance. Unfortunately, the remittance information is
sometimes no more than barely legible copies of the invoices with handwritten notes on the adjustments
stapled to the cheque. One of the critical tasks of the accounts receivable department, then, is to figure
out what has been paid for so that the outstanding invoices can be closed out.
Some companies are able to use an alternative approach called balance forward. In this system, the
company applies customer payments to outstanding balances and simply carries forward any unpaid
amounts to the next billing period. Examples include credit card companies and those supplying public
utility services such as water, electricity and gas, where the only remittance information needed is the
customer’s account number, the amount of payment and the date received. These systems generally
utilise a scannable remittance document, which allows for automated capture of payment and account
information. Automated processing reduces the costs of the cash application process.
cash application
The process through which
a customer’s payment is
posted to its account and
the outstanding invoices are
cleared as paidCONCEPT REVIEW QUESTIONS 18-5
14 What is a collection policy? What is the typical sequence of actions taken by a company when
attempting to collect an overdue account?15 Why should a company actively monitor the accounts receivable of its credit customers? Describe
how each of the following credit monitoring techniques works: (a) average collection period; (b)
ageing of accounts receivable; and (c) payment-pattern monitoring.example