• Wade Myers

Entering Accounts Receivable Assumptions

Q: How do I enter the assumption that my customers pay quarterly in advance and how does that impact cash flow?


A: The Accounts Receivable (AR) assumptions are entered for each Offering because billing and collections can often be quite distinct depending upon the Offering. For example, a one-time setup fee that is invoiced and due within 30 days vs. a quarterly advance contract payment as you reference, have vastly different cash implications. 


The Startup Financial Model automatically calculates the Balance Sheet and Cash Flow implications (including AR, Deferred Revenue, etc.) based upon how you configure your billing and payments options and our app allows you a great deal of flexibility as follows:


One-Time Offerings: The assumptions for one-time offerings are as shown below:


You can see the cash and working capital implications of your AR assumptions by changing the entries and reviewing the Revenue Summary for each Offering in the Sales detail report. Be sure to drill into the monthly view to see the impact of your configuration on the monthly cash, receivables, and deferred revenue. In this example, we've chosen billed monthly and collected in the same month as the installation for a one-time device sale shown above with a price of 350 each. To make it simple, we just assumed a sales forecast of 100 installs/per month.


With only a few inputs the model calculates and shows all of the details such as the monthly sales...


...and scroll further down the Sales report to see Revenue Summary and the cash and AR impact of the billing choice to bill and collect in the same month as the installation:


Recurring Offerings: The assumptions for recurring offerings, can be more complex and our app allows you additional choices as shown below. 


As in the one-time example, for recurring offerings, you can also see the cash and working capital implications of your AR assumptions by changing the entries and reviewing the Revenue Summary in the Sales detail report.  For recurring offerings, however, the cash impact of billing for multiple periods in advance, such as annually or quartelry, have an enormous impact. In this example, we've chosen billed quarterly and collected in the same month (advance) and tied the sales to the device sales of 100 per month. We also assumed a 49.99 price/month.


With only a few inputs the model calculates and shows all of the details such as the monthly sales (in this case, because it is a recurring sales model, note how the 100/month of new customers grow because of the recurring model)...


...and again, scroll further down the Sales report to see Revenue Summary and the cash and AR impact of the choice to bill and collect quarterly in advance for the app. In this case, each month, we are collecting 3 months of revenue in terms of cash, recognizing one month each in revenue, and deferring the rest, which shows up on the Balance Sheet as a deferred revenue liability - all automatically to give you a highly-credible financial model with little effort:


Note: Every business plan should strive to keep a very short AR cycle and if at all possible to get customers to pay in advance because of the significant cash implications.

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