Cash Support for Sales Growth

As sales grow, cash needs will grow. Planning for future sales must include planning for additional requirements for cash. A basic formula can be used to help determine the amount of additional cash needed for new sales. The formula is calculated as follows:

Additional Cash = ((New Sales - Gross Profit) + Additional Overhead) / (Sales Growth Duration in Days x Average number of days to collect Receivables + Safety Factor)

Example: We expect $ 10,000 of additional sales during the year (365 days) with a corresponding increase of $ 3,000 in overhead. All payables are paid on time, we do not expect any changes in our collection periods, and we expect a continued gross profit margin of 25%. The average period to collect receivables is 40 days and we will add in a safety factor of 20% into our estimate.

($ 10,000 - $ 2,500) + $ 3,000 / 365 = $ 28.77 x (40 x 1.20) = $ 1,381 of additional cash is needed to support the $ 10,000 of additional sales.

The above formula is a quick and rough estimate for estimating how much cash is needed to carry additional sales. Changes in collections and payment cycles need to be considered when using this formula.