Receipts and disbursements method
/What is the Receipts and Disbursements Method?
The receipts and disbursements method is used to construct a cash flow forecast. It is derived from actual and estimated accounts receivable and accounts payable. The source information has a relatively short time horizon, so the method's accuracy declines rapidly beyond a few months of forecasting. Within the near term, the results of this method can be quite accurate. Outside of the period covered by accounts receivable and accounts payable, a business needs to use alternative cash forecasting methods that tend to be less accurate.
An example of a cash flow forecast that was developed using the receipts and disbursements method appears below.
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Advantages of the Receipts and Disbursements Method
The key advantages of the receipts and disbursements method are as follows:
Accurate short-term forecasting. The method provides a detailed and precise forecast for short-term cash needs (daily, weekly, or monthly). This helps businesses plan for upcoming payments and avoid cash shortages.
Simple to use. The method is easy to understand and implement, especially for small businesses.
Helps with liquidity management. The method ensures that a company maintains sufficient cash reserves to meet obligations.
Easy to track and adjust. The method is based on actual cash movements, making it easy to update and modify as new transactions occur.
Identifies cash changes. The method helps to determine when excess cash can be invested or used to pay off debt.
Useful for managing seasonal businesses. The method is particularly beneficial for businesses with seasonal fluctuations in cash flow (e.g., retail, agriculture, tourism).
The receipts and disbursements method is ideal for short-term cash forecasting because of its accuracy, simplicity, and real-time monitoring benefits.