That’s an increase of $206,111 from the end of 2000 and represents an additional cash outflow on 2001’s cash-flow statement. Note that even though receivables are managed a bit more tightly overall as measured by the drop from 31 days to 30 days, they are still increasing in absolute dollars because of the sales-growth factor.

Next comes cost of goods sold, which is 1 minus gross margin percentage. Stated another way, gross margin is what remains after cost of goods sold is subtracted from sales. Since forecasted gross margin for 2001 on our CDSS is 43.7%, then cost of goods sold must be 1 minus 0.437, or 0.563 of sales.

Forecast sales for 2001 of $41,968,612 x 0.563 = $23,628,329 cost of goods sold. That number, too, has to be adjusted for the change in relevant balance-sheet values in order to present it in cash terms—that is, to move from cost of goods sold to cash production costs, which requires that we then calculate projected changes in inventory and payables. As done above with accounts receivable, we have to calculate forecasted values for these payables and inventory figures based on days assumptions captured on the CDSS. Then we indicate the cash effect of the resultant movement up or down, remembering that an increase in a liability (such as payables) is always considered cash in—that is, a positive number in cash terms. An increase in an asset, though, goes the opposite way, the presumption of cash out to increase any asset, in this case, inventory.

In the process of completing the cash-flow projection, we will have to make a few relatively simple and quite reasonable assumptions. At some point, you will probably want to set this up on a computer spreadsheet for real-world use. For purposes of learning and understanding, however, I recommend that you do it manually at least a few times first. Before you go the rest of the way into the line-by-line detail of the projection, it may be helpful to review once more the general sequence of the cash-flow statement logic.

Taken From : Cash Rules