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Collections Forecasting – Key Things to Watch

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What Is Accounts Receivable Forecasting?

Collections forecasting is a process of measuring and tracking payment history that can help businesses predict their future cash flow. Specifically, accounts receivable forecasting uses clients' payment histories to determine when and how much they are likely to pay in the future. This information can be crucial for companies to make important financial decisions, such as whether to seek additional financing, adjust payment terms, or take other actions to improve their cash flow. By accurately forecasting collections, businesses can better manage their finances and plan for the future with greater confidence.

Why Is Accurate Accounts Receivable Forecasting Important for Businesses?

Cash flow is critical for any business, as it enables you to cover your monthly operating expenses, such as supplies, vendors, and investments in new projects. Without a clear understanding of your future cash flow, it becomes challenging to make effective business decisions.

Accounts receivable forecasting can provide you with an accurate and reliable balance sheet forecast, which can have a profound impact on your working capital. By knowing what your accounts receivable will look like in the future, you can avoid relying on external financing options to boost your cash flow. Additionally, if you do need to use financing facilities, having this knowledge will enable you to make more informed decisions about the amount you need and the expected repayment period.

Similarly, an accounts payable projection can equip you with the tools and knowledge necessary to make better, more effective decisions across all aspects of your business. By accurately forecasting your accounts payable, you can plan ahead for expenses and ensure that you have the sufficient cash flow to meet your obligations. This can help you avoid late payments and associated fees while also improving your relationships with suppliers and other stakeholders. Ultimately, both accounts receivable and accounts payable forecasting can play a crucial role in optimizing your financial operations and achieving long-term business success.

A Step-by-Step Guide to Forecasting Accounts Receivable Using DSO

Calculating an accounts receivable projection using days sales outstanding (DSO) is one of the easiest ways to forecast accounts receivable. The first step is to calculate the DSO, which is the average accounts receivable divided by the annual revenue divided by 365. Once you have the DSO, you can calculate the accounts receivable forecast by multiplying the DSO by the sales forecast and dividing it by the number of days in the forecast period. This will give you an accurate prediction of your expected accounts receivable in the short term. By having this information, businesses can make better-informed decisions about their cash flow, allowing them to plan and budget more effectively.

Effective Tips to Improve the Accuracy of Your Accounts Receivable Forecasting

Accurately forecasting your accounts receivable (A/R) is crucial to predicting future cash flow and making effective business decisions. However, predicting the future is not always easy. To increase the accuracy of your A/R forecast, there are several steps you can take:

  • Split your A/R into subcategories based on specific criteria such as customer size. This helps you identify trends and patterns that can be used to adjust your assumptions and make more accurate predictions.
  • Monitor and adjust assumptions regularly as things change.
  • Use an automated A/R platform to streamline your calculations and increase prediction accuracy. By accurately forecasting your A/R, you can make better decisions for your business.

Discover how Payference can enable your business to grow without sacrificing your Accounts Receivable team's productivity.

Still have questions? Our team would love to chat with you about your unique needs and challenges. Helping businesses distill what they really need to get the most out of automating their AR process is what we do, so give us a call or set up a demo today.