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Artificial Intelligence: Impacts on Forecasting Accounts Receivable

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Generally, accounts receivable is the largest asset for most businesses. Unfortunately, not all finance teams follow the most efficient practices and policies for managing their receivables to ensure better collections and higher profits. One way to improve in this area is by using artificial intelligence to forecast AR and optimize working capital.

No one sets out to have poorly managed accounts receivable. As a business grows and its B2B relationships and payment terms become more complex, managing AR also becomes complicated. The cash flow issues that result from poor forecasting of accounts receivable can usually be traced to inaccuracies and inconsistencies–both of which can be mitigated with technologies powered by artificial intelligence.

Even if you have standardized accounts receivable policies regarding the timing of invoices, payment terms, credit and collections, if your business doesn’t focus on the importance of the accounts receivable function, eventually problems with cash flow will arise. For example, if your company's mindset is that winning a sale is above all else, it can become a habit to waffle on critical items such as credit terms and past due penalties.

While you may get more sales or keep a long-term customer, keep in mind you also have just provided those accounts with free financing. And if you then have to borrow because of negative cash flow, you’ll be the one paying finance charges. By not managing your accounts receivable effectively, not only have you potentially set up the business to incur an unnecessary cost (for a loan), you’ve also added to that cost because the value of your overdue accounts decline as they age. 

So instead of having the capital to invest or grow the business, funds are tied up in your accounts receivable. There’s an opportunity to increase cash flow and generate higher profits with improved AR management.

Automating your AR is one way to ensure that your accounts receivable policies are consistently followed. Workflows and rules can be set in such a way that they’re not easily overridden. Automation also takes human error and much of the human decision-making out of the process to reduce the impact of inaccurate or limited financial information.

But using artificial intelligence (AI) in your accounts receivable along with automation takes everything to a whole different level. It can produce higher collections, process a larger volume of invoices more quickly, provide you with valuable insights for improved decision making, optimize your working capital and allow you to predict future cash positions with a high level of accuracy.

Risks Rather Than Rewards

A streamlined, organized accounts receivable process means you should be able to forecast your accounts receivable to fund operations, prepare for shortfalls and plan for expenditures and growth. However, if other business functions are prioritized over accounts receivable or weak AR management is allowed to continue, practices that threaten a healthy cash flow increase: 

  • DSO is increasing rather than decreasing
  • Follow up on overdue accounts is inconsistent
  • Sales is allowed to influence credit limits
  • Invoices go out with inaccurate information about amounts due, payment and credit terms
  • Payments are often allocated incorrectly
  • Decisions are being made based on inadequate data

If you recognize that one or more of these items are repeatedly occurring within your AR, then using accounts receivable automation software that leverages AI is an effective way to take control of your receivables.

How AI Impacts Forecasting Accounts Receivable

It’s true, AR automation software alone can remedy most of the “risky” practices listed above by streamlining the processing of transactions and standardization. It can speed up the invoicing process by automatically transferring sales data, creating an invoice and sending it out electronically. Payment reminders and past due notices can be set up to go out automatically. Errors and omissions are greatly reduced. And accounts are automatically reconciled–as long as the payment and invoice match.

So what does artificial intelligence bring to the table? What other benefits can you expect if you choose AI-driven AR automation software?

Higher collections

AI-powered solutions can quickly identify customers that need to be prodded about a past due invoice. And they can give you additional information to help you achieve the results you’re looking for–a payment. Because AI analyzes historical patterns, it can suggest the best way to contact a particular customer, whether that’s through email, phone or some other avenue. It can also tell you your customer’s preferred method of payment. Armed with these insights into your customer’s habits, you stand a much better chance of collecting the debt.

Quicker processing

Solutions powered by AI can process a large number of invoices faster, so your overall cash application processing time is quicker. These solutions can gather remittance data from disparate sources, match it with data from an invoice and reconcile it to the correct customer account in seconds. Not only can they do a simple match with an invoice number, they can swiftly analyze situations such as when a customer’s payment covers multiple invoices or doesn’t match an invoice in your accounting system. Using trend analysis to study patterns of payment, the solutions can create reconciliation rules like best match, normal match, LIFO and FIFO.

Key insights

AI-enabled AR solutions will give you valuable information to use in decision making. They can extract historical data–disputed invoices, open, closed, customer loyalty, to name a few–and external data–interest rates and credit ratings–to help you identify risky accounts and predict late payments. For example, the technology can give you key  insights on a variety of possible credit scenarios and different AR use-cases like payment dates.

Another way to benefit from the power of AI to provide insights is by reducing the time it takes to resolve disputes. Instead of spending valuable time and effort to search for the records you need like claim documents, proof of delivery and other helpful documentation, they can be retrieved quickly simply by entering data in a few fields.

Optimized working capital

Again by analyzing your data at a granular level at a speed and depth not humanly possible, AI can help ensure your working capital is optimized. First, it will identify where you have idle–or hidden–cash. Although it’s smart to have reserves of cash for the proverbial rainy day, you don’t want to set aside more than you need to. It doesn’t work for you if it’s sitting in a non- or little-interest bearing account.

AI will learn over time to predict your customers’ upcoming payments as well as identify high risk accounts that threaten cash flow. It will use that intelligence to forecast the amount of funds you’ll need for upcoming demands.

On the Payables side, artificial intelligence will help you determine the best time and terms for your own suppliers to improve cash flow.

More Accurate Forecasts

Using artificial intelligence to forecast accounts receivable will give you more accurate cash projections for both long term and short term forecasts. First, the software connects your financial data sources–ERP, bank accounts, invoices, etc. So, instead of having data stored in disparate places, it’s all in one location for immediate and complete access.

Next, rather than your finance team spending days gathering data and preparing it for presentation, they can retrieve what they need with only a few clicks. And there will be no incoming or outgoing transactions since the point in time the forecast was created–it’s up-to-date and in real-time. 

Armed with a highly accurate forecast, you’re better informed to make decisions regarding investing, expansion, expenditures or cutting costs.

Payference is an AI-powered cash management tool that makes forecasting accounts receivable faster, more accurate and more profitable. Schedule a demo and see why Payference has become the preference of forward-thinking finance teams.