Oct 31, 2023
Staying on top of your business finances involves more than just sales and expenditures. Knowing your past, present, and future cash flow is essential for ensuring your business's long-term success. That's where accounts receivable forecasting comes in. This guide aims to demystify what it means to forecast your accounts receivable, why it's crucial, and how Resolve can effortlessly simplify the process for you. Keep reading to level up your understanding of accounts receivable and take a proactive stance on your business's cash flow management.
What does "forecasting accounts receivable" mean, and why is it important?
Forecasting accounts receivable (AR) is the process of predicting how much money your customers will owe you in a specific time frame. It's the art of crunching numbers to give your business the financial foresight it needs to plan for months and years ahead. Accurate accounts receivable forecasting aids in better cash flow management and strategic planning. By knowing what to expect, you can make informed decisions on investments, expansions, and even debt repayment. Accounts receivable forecasting is all about better understanding your incoming cash so your business runs and grows smoothly.
Is forecasting AR hard?
Forecasting accounts receivable isn't hard, but it does come with a unique set of challenges. The root of these challenges is the natural uncertainty that comes with any business. Historical data and current market trends can guide you, but they can't predict the future. Inaccurate forecasts can result in cash flow bottlenecks, affecting everything from payroll to inventory, so it's vital to be as accurate as possible with your calculations.
This is where Resolve steps in, helping to stabilize your balance sheets and financial forecasting. The platform helps businesses get paid 30 to 60 days faster and offers Advance Pay (cash advances) on net terms invoices to unlock cash flow. This flexibility allows for more accurate and reliable forecasting for your business. With these tools, business owners remove some guesswork from the equation, allowing them to focus on growing their business.
How can your accounts receivable be affected?
Several things can cause your financial statements to fluctuate, such as market volatility, seasonality, and client payment behaviors. Unforeseen circumstances like supply chain issues or economic downturns can negatively impact your business, delaying payments and affecting your forecasting accuracy. Your accounts receivables are influenced by both internal operations and external market conditions, many of which are out of our direct control. Accounts receivable forecasting can provide some predictability in the ever-evolving world of business.
How to forecast accounts receivable
Ready to forecast your accounts receivable? The process isn't as daunting as it might seem, especially when you break it down into manageable steps. With the right tools and information, you'll find that these important financial insights can become a core part of planning for your business’s future. Here's a quick rundown to help you get started and make the forecasting journey simpler and more efficient:
First step: Accounts receivable DSO
The first step in forecasting your accounts receivable involves understanding your Days Sales Outstanding (DSO). DSO measures the average number of days it takes for your company to collect payment after making a sale. This key metric gives insight into the effectiveness of your collections process and how much cash you have coming into your business in a given period. A high DSO can signal cash flow management issues, while a low DSO indicates that your business is quick to receive payment from clients. Keep an eye on your business DSO number, as it's a significant metric in accounts receivable forecasting.
Second step: Forecast sales calculator
Next, forecast your business’ sales. A handy calculator, specially designed for this, can help you in this process. Such a tool uses your historical data to estimate future sales, which in turn helps predict your accounts receivable. Understanding your past revenue patterns allows you to create more accurate financial forecasts and maintain control over the direction of your business.
An advanced revenue calculator usually factors in seasonality, growth rate, and other variables. While important for accuracy, having a starting point for calculation is a significant first step. There are a wide variety of free sales calculators online, like this useful one, to help you calculate these powerful starting points. Remember, the accuracy of your sales forecast directly impacts the accuracy of your accounts receivable forecast.
Finally: Forecast accounts receivable formula
Once you've determined your Days Sales Outstanding (DSO) and completed your sales forecast, it's time to finalize your accounts receivable forecast. The formula is relatively straightforward:
Forecast Accounts Receivable = (DSO/365) × Sales Forecast
The formula helps paint a clear picture of your accounts receivable forecast using your business' days sales outstanding (DSO) and sales forecast. By dividing DSO by 365 (the total number of days per year), you get a daily rate of how long it typically takes to collect a receivable. Multiplying this rate by your sales forecast gives you an estimated accounts receivable amount you can expect for that period. The result is invaluable insights for your cash flow forecasting process, making it easier for you to make informed financial decisions for your business and its future.
Account receivable turnover ratio
It's also a good idea to keep a close eye on your business' accounts receivable turnover ratio. This ratio measures how efficiently your business collects payments from customers who have an outstanding invoice. Timely payments from these clients can heavily contribute to smooth cash flow, making this metric a powerful gauge for the health and accuracy of your accounts receivable forecasting.
A high turnover ratio means you're collecting receivables more quickly, which is a positive sign. On the flip side, a low turnover can signal payment problems, potentially affecting your forecasting and business cash flow. Make sure to politely remind clients about repayment when and where appropriate. If you find yourself getting lost in reminders and follow-ups, you're not alone. Countless businesses trust Resolve to manage this process for them, freeing up time to focus on running and scaling their operations.
How to calculate accounts receivable
Understanding how to calculate your accounts receivable is necessary for accurate financial forecasting. Your accounts receivable is the sum of all invoices that are yet to be paid by your customers. The basic formula is:
Accounts Receivable = Total Credit Sales − Payments Received
Total credit sales are the sales made on credit, meaning you have yet to receive the payment. Payments received refers to the cash collected from customers against the credit sales, meaning you have the cash in your account. Remember that different customers might have different payment terms - factoring in repayment terms1 helps paint a more accurate picture for financial forecasting. Precise calculation is important, as it impacts other key metrics like accounts receivable turnover ratio and overall financial health.
Collection of AR
Collecting accounts receivable (AR) is more than just sending out invoices and waiting for payment. It's an active process requiring a systematic approach for tracking unpaid invoices, following up with customers, and ensuring sustainable cash flow for your business. This process often includes setting up payment reminders, making collection calls, and even initiating legal action for long-overdue amounts. There's a lot of work involved and not much time in the day to get it all done.
That's why many businesses opt to work with accounts receivable professionals and alleviate the time commitment associated with invoice management. Resolve is a leading company in this field, helping manage their customers' cash flow, accounts receivable, and more. From payment processing to sending out polite but firm reminders, Resolve handles their customers' receivable process. This level of automation saves time and provides business owners with more accurate and timely data—crucial for reliable forecasting.
Wrapping up
Financial predictability is often more of a theory than a hard science. Accurate accounts receivable forecasting in an ever-evolving business landscape is no small feat. But with the right methods and tools, it can become a manageable, streamlined process.
Resolve makes accounts receivable (AR) forecasting and management simple, offering a one-stop solution for automating your AR processes. From cash advances to collections, Resolve speeds up payments and better cash flow for your business, giving you high-quality data that you can use to forecast your business's financial future with confidence.
So, why gamble with financial stability when you can predict it? Choose Resolve for a smarter, more efficient way to handle your accounts receivable and forecast a brighter financial future together.
1Repayment terms are like the rules or guidelines you agree to when you borrow money. They tell you how much you need to pay back, when you need to pay it, and what might happen if you're late with your payments. It's like a plan or schedule for returning the money you borrowed.
