Accounts receivable is the lifeblood of a business’s cash flow. According to Forbes, 39% of all the invoices sent are paid late in the United States. Without a proper accounts receivable process in place, business owners will be repeatedly facing cash flow problems which will eventually affect the financial health of their business. This is when accounts receivable forecasting becomes important.
In this article, we will highlight the meaning of accounts receivable forecasting, the challenges involved in it, and explain how to calculate it.
What is Accounts Receivable Forecasting?
Accounts receivable forecasting is the process of predicting future cash inflows by estimating when customers will pay outstanding invoices. It involves analyzing historical payment data to identify trends and patterns and applying them to future projections.
How to Forecast Accounts Receivable?
Forecasting accounts receivable involves a few steps. By following these steps, businesses can better predict cash flow and manage their finances effectively.
Calculate Day Sales Outstanding
Days Sales Outstanding (DSO) is a financial metric that measures the average number of days it takes a company to collect payment from customers for credit sales. In essence, it indicates the efficiency of a company’s credit and collections process. A lower DSO generally implies better collection practices.
Formula:
DSO = (Average Accounts Receivable / Net Credit Sales) * Number of Days in the Period
- Average Accounts Receivable: This is the average amount of money owed to the company by customers for goods or services sold on credit over a specific period. It’s calculated as the sum of beginning and ending accounts receivable divided by 2.
- Net Credit Sales: This represents the total amount of credit sales generated during the period, excluding any returns, discounts, or allowances.
- Number of days in the period: This is the number of days in the period for which you are calculating DSO (e.g., 30 days for a month, 90 days for a quarter).
Calculate Sales Forecasting
Sales forecasting is the process of estimating future sales revenue for a specific period. It involves analyzing historical data, market trends, economic indicators, and other relevant factors to predict sales volume. Accurate sales forecasting helps businesses make informed decisions about production, inventory, budgeting, and resource allocation.
Accounts Receivable Forecasting Formula
The formula for Accounts Receivable Forecasting is:
Accounts Receivable Forecast = DSO * (Sales Forecast / Time Period)
This formula essentially calculates the estimated amount of money a company expects to have tied up in outstanding customer invoices at a specific point in the future.
- Time Period: This can be daily, weekly, monthly, or quarterly, depending on your forecasting needs.
- Adjustments: Consider additional factors like new customers, changes in payment terms, or economic conditions to refine the forecast.
Benefits of Accounts Receivable Forecasting
Accounts receivable forecasting offers several advantages for businesses:
- Improved cash flow management: By anticipating future cash inflows, companies can better manage their finances, ensuring sufficient funds for operations.
- Enhanced decision-making: Accurate forecasts support strategic planning, budgeting, and resource allocation.
- Reduced risk of bad debts: Identifying potential payment issues early allows for proactive collection efforts, minimizing bad debt losses.
- Optimized working capital: Effective forecasting helps manage working capital efficiently by balancing accounts receivable and inventory levels.
- Improved financial planning: Accurate forecasts contribute to more reliable financial statements and projections.
- Facilitated debt management: Understanding future cash flow aids in managing debt obligations and ensuring timely payments.
- Enhanced investor confidence: Demonstrates financial stability and predictability, attracting potential investors.
In today’s dynamic business environment, accounts receivable forecasting is not just a financial exercise—it’s a strategic imperative. As businesses grapple with fluctuating market conditions and evolving customer behaviors, the ability to predict cash inflows with precision has become crucial. Effective forecasting transforms the accounting landscape by providing actionable insights that drive informed decision-making.
For businesses looking to forecast their accounts receivable, outsourcing to accounts receivable management services can be transforming. These services offer specialized expertise in analyzing payment trends, managing cash flow, and utilizing advanced forecasting tools to provide accurate predictions.
First Credit Services, a business process outsourcing company excels in this domain, offering comprehensive accounts receivable forecasting tailored to your business needs. The BPO services also include debt and credit collection services. Our expert team leverages industry best practices and cutting-edge technology to deliver precise cash flow forecasts, enabling you to make informed financial decisions and maintain a healthy cash flow.
