Cash flow represents the money coming in and going out of your business. Managing cash flow is one of the most important aspects of business. In the planning phase, your cash flow estimates can help you decide whether your business idea is viable. You can also radically change your cash outlook by adjusting a few basic assumptions about when you pay and get paid.
Accounts receivable is also sometimes known as incoming payments or A/R.
When planning your spending, it is important to recognize the timing involved in any inbound sales on credit — what your accountant calls "accounts receivable." If you receive cash for a sale today, that money is immediately available for you to use. On the other hand, if you agree to invoice your customer for future payment, you have to wait for that payment to come in before the money is available to you.
To forecast your accounts receivable, click on the Forecast tab > More... > Cash Flow Assumptions:
First, estimate the portion of your revenue that comes from credit sales — that is, invoices that your customers will pay later, rather than paying you in cash at the time of purchase. Credit sales will affect your cash balance, since you have to wait for payment.
Adjust the Sales on credit slider to indicate the portion of your sales that will be on credit (invoices):
You can minimize the effect of sales on credit by following up with your customers to ensure you are paid on time and managing your spending to keep a reasonable buffer in the bank. Otherwise, it's possible to be profitable on paper but end up going under anyway, because the money owed to you is not available in time.
Decide how long it will take, on average, to get paid for your credit sales. Faster payments are better, since you can use the cash received to pay expenses or fund growth. Timely reminders and collection tactics can minimize the risk associated with credit sales.
Use the Days to get paid slider to indicate how many days it will take you, on average, to collect on your invoices:
Using the project cash chart at the top of the view, you can see the immediate effects that your estimated inbound sales on credit have on your available cash:
Accounts payable is sometimes also referred to as outgoing payments or A/P.
Just as slow payments from your customers will hurt your cash flow, so will fast payments to your suppliers. Think about the timing of your outgoing payments — what your accountant calls "accounts payable." Paying later for your purchases, instead of immediately, will leave more cash in the bank for your business to work with.
To forecast your accounts payable, click on the Forecast tab > More... > Cash Flow Assumptions:
Estimate the portion of your spending (excluding personnel costs) that will be on credit from your vendors, rather than paid immediately. It is to your advantage to accept credit terms whenever possible, so you can keep your cash on hand longer.
Use the Purchases on credit slider to indicate the portion (%) of your purchases you will make with credit:
Suppliers offer terms for purchases on credit, typically requiring payment within 15 days, 30 days, or even longer. It’s good for you to take advantage of that time. If suppliers give you the option to hang onto your cash for now and pay your bills later, your business will be stronger for it. Just as slow payments from your customers will hurt your cash flow, so will unnecessarily fast payments to your suppliers. Paying a little slower will keep more cash in the bank for you to work with.
Adjust the Days to pay slider to indicate how many days it will take you to pay your bills:
Using the projected cash chart at the top of the view, you can see the immediate effects that your estimated outbound payments have on your available cash:
Where does this entry appear in the financial statements?
The Cash Flow Assumptions don't appear in the Profit and Loss table explicitly, except to possibly move some revenues and some expenses to future months.
In the Balance Sheet, your Accounts Receivable and Accounts Payable will appear as shown below:
In the Cash Flow, accounts receivable and payable will appear as "Changes," meaning the amount of increase or decrease in accounts receivable or payable each period. If you see a zero listed here, it doesn't mean there were no receivable or payables; it means there was no change in them: