Small Business Credit: Analyzing Cash Flows: Analyzing Cash from Sales

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Cash collected from Sales

Cash Flow Summary

Jasmine and Co.





? Accounts receivables


Cash collected from sales


Figure 4: Extract Cash flow Summary- Cash collected from sales

As in the income statement we begin with Sales. However, all sales transactions may not have been carried out in cash, i.e. there could have been credit sales. These sales would need to be removed so that we arrive at sales that were carried out on a cash basis. Credit sales are reflected in Account Receivables. An increase in accounts receivables indicates that additional goods were sold during the year for which cash was not received. In the cash flow summary the impact of an increase (decrease) in account receivables is accounted for by subtracting (adding) the amount from (to) the Sales figure.

As a general rule, the reader should note that an increase in assets is deducted from the cash flow summary whereas a decrease in assets is added in the cash flow summary. The opposite is true for liabilities.

Cash flow analysis

Quantitative analysis

  • Changes in sales:
    • The sales have increased by 33% from last year’s numbers.
  • Changes in accounts receivables due to sale:
    • All things equal we would expect the accounts receivables to have also increased by 33%, i.e. by $2,325. However as we can see this has not been the case. We will discuss the reasons for this below.
  • Accounts receivables as a percentage of sales:
    • Account receivables is 19.6% (=7,300 / 37,300) of sales in 2010. In other words, we expect that for $1 of sales that will be 20c of account receivables.
  • Accounts receivables turnover ratio:
    • This the number of days customers take in paying back their debts. It is also known as the debtors turnover ratio. It is calculated as (Accounts receivables/Sales) x 365.

      The ratio stood at 91 days in 2009 and declined to 71 days in 2010.

  • Average daily sales:
    • This is calculated as Sales/ 365. For 2010 the average daily sales was $102.2.

Recall in b) above that we expected the account receivables to increase by the same percentage as sales. However this did not happen. This is because the account receivables turnover ratio declined. This meant that the debtors were paying off their debts at a faster rate in 2010 as compared to the rate in 2009. In fact the delay in payment declined by 20 days (=91-71). Using the daily average sales rate this represents a decline in account receivables of $2025.

The net impact on accounts receivables of an increase in sales and a decline in the debtors turnover ratio is an increase in accounts receivables of $300 (=2325-2025).

Qualitative analysis

Qualitative analysis involves trying to understand the reasons for the changes assessed during the quantitative analysis. In particular it involves finding out how industry, business and management conditions might have caused these changes.

We need to assess the company’s growth/ turnover ratio with that of other companies in the industry. If there are significant differences in the growth rates/ ratios then we need to find out the reasons behind these differences and whether or not such rates/ ratios, if favorable, are sustainable in the future.

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