The Cash-Adjusted Income Statement (6)
You can quickly estimate next quarter’s approximate level of cash flow from these elements. Here’s how: One business quarter is 90 days, so receivables at 45 days turn twice in that
period, yielding cash in from receivables of 2 x $200,000 = $400,000. But receivables from new sales at the same selling rate immediately reverse that cash in for a net of zero— although you collect $400,000 from customers in that 90-day period, you also extend another 90 days worth of credit in the same period. However, you do hold on to half of the $400,000, in the form of 50% gross margins totaling $200,000. From that $200,000 in cash gross margin, you pay out 40% of the $400,000 in sales for SG&A expenses totaling
$160,000. That leaves you with a net of $40,000 to cover interest expense, taxes, dividends and capital expenditures. And, this assumes no growth in sales, in which case additional cash would be needed to support net growth in receivables and inventory.
