Collections Forecasting – Key Things to Watch

Wouldn’t it be nice to be able to accurately predict your future cash flow? You could better allocate funds and make more informed business decisions. Luckily, you can with accounts receivable forecasting.

Accounts receivable forecasting is like having a financial crystal ball. While it might be a challenge, depending on how you manage your accounts receivable, forecasting is a powerful tool to help you grow your business. Here’s how to forecast accounts receivable to quickly and reliably predict your future cash flow.

What is Accounts Receivable Forecasting?

Accounts receivable forecasting is a way to measure and track payment history and can also be used to predict future payments. It relies on clients’ payment histories to determine what your cash flow will look like in the future.

Why Is Forecasting Accounts Receivable Collections Important?

Cash flow is essential for business. It allows you to pay for monthly operating expenses like supplies, vendors, or even investments into new projects. If you’re not sure what your cash flow will look like in the future, you won’t be able to make effective business decisions.

Forecasting accounts receivable can provide you with an accurate and reliable balance sheet forecast, which can profoundly impact your working capital. If you know what your A/R will look like in the future, you won’t have to rely on external financing options to boost your cash flow. And if you still need to utilize financing facilities, you’ll be able to make more informed decisions about how much you’ll need and how long it’ll take to pay it back.

Projecting accounts receivable simply gives you the tools and knowledge to help you make better, more effective decisions for almost all business aspects.

Forecasting Accounts Receivable Collections Using DSO

The easiest and most accurate way to forecast your accounts receivable is using days sales outstanding (DSO). 

Here are the steps to calculate an accounts payable projection using DSO.

Step 1: Sales Forecast 

The first step to predicting your accounts receivable is to determine a sales forecast. A sales forecast is simply the number of sales you expect to make over a certain period.

The easiest way to create an accurate sales forecast is to look at historical data. Most business is cyclical. If you made $300,000 for a certain month last year, there’s a good chance you’ll make something similar this year.

Don’t forget to account for any changes that may have occurred over the past year:

• Price changes
• Customer or account acquisitions
• Changes in payment terms
• Economy
• Market growth

It might take some time to research all the data, but an accurate sales forecast is essential for predicting accounts receivable.

Step 2: Calculate Days Sales Outstanding 

DSO stands for days sales outstanding, and it’s an important key performance indicator (KPI) used to determine your business’s financial health. It measures how long it takes customers to pay invoices on average, which directly impacts future cash flow.

Here’s the DSO calculation formula:

Days Sales Outstanding = (Accounts Receivable / Total Sales) x Number of Days

Once you know your average DSO, you can use that information to forecast your future accounts receivable.

Step 3: Calculate Accounts Receivable Forecast 

Once you have your DSO and sales forecast, you use them to determine your accounts receivable forecast.

Accounts Receivable Forecast = Days Sales Outstanding x (Sales Forecast / Time Period)

Understanding your average DSO and sales forecast gives you a great base perspective, but it’s important to remember that reality is unexpected and you cannot always expect an average outcome. There will always be those clients that are either overdue or prepaid in invoices. And it’s crucial to keep those possibilities in mind. 

Start with the data you have, and then identify which clients tend to deviate from an average payment cycle and take those into consideration. The final calculation will give you an accurate estimate of the cash you can expect to receive in the upcoming period – not just the sales. You can forecast accounts receivable for any time period. Most businesses choose either monthly or annual forecasts.

Tips to Increase Your Cash Flow Forecasting Accuracy

Predicting the future is never foolproof. That’s why accuracy is key when you calculate your A/R forecast. Here are a few tips to help you increase the accuracy of projecting accounts receivable:

• Split accounts receivable into subcategories. As you’re looking through historic data, separate your customer accounts based on specific criteria like customer size.
• Monitor and adjust assumptions. Things change. Don’t just run the same forecasting calculations over and over. Every time you predict your A/R, adjust your assumptions based on all available data.
• Use an automated A/R platform. Manually managing your A/R is time-consuming and leaves room for human error. The more potential for error, the less accurate your forecasting will be. Switch to an automated A/R platform like Gaviti to streamline your calculations and increase prediction accuracy.

How Gaviti Helps Forecast Your Accounts Receivable 

With an accurate A/R forecast, you’re ready to predict future cash flow to make better, more effective decisions for your business. But cash flow forecasting accuracy is only one element of effective accounts receivables management. Gaviti’s invoice-to-cash A/R management and automation platform streamlines your entire accounts receivables lifecycle, from invoice collections to payment reconciliation and accurately forecasting accounts receivable. 

Its modules include: 

• Self-Service Payer Portal.  View payment history and outstanding invoices in one centralized place. Offer your customers a range of payment options, including credit cards, debit cards, ACH transfers, electronic wallets, and more, enhancing the convenience for your customers and increasing the likelihood of on-time payments.

• Cash Application. Associate each payment with its corresponding invoice for precise application and reconciliation of payments with remittance information such as invoice numbers or payment references. When using the self-service payer portal, it can match payments to open invoices with near 100% accuracy. 

• Credit Management and Monitoring. Automatically manage customer credit from the credit application process through ongoing monitoring with real-time credit risk alerts. Tailor the risk assessment process of each customer according to the requirements that align with your business needs.   

• Collections Analytics. Track collections performance of both individual team members and your A/R team as a whole using KPIs such as Total A/R, DSO, Collections rate, customer risk, etc. In addition, you’ll be able to correlate payment history with customer risk to generate AI-driven insights that accurately forecast future payments.

• Disputes and Deductions. Streamline the tracking, coding, routing, and resolution of customer invoice deductions from a centralized location, providing a collaborative environment where teams can communicate, share documents, and work together to resolve issues. This helps to expedite resolution, improve customer satisfaction, and reduce the impact on cash flow.

Want to learn more about how you can use Gaviti’s A/R management and automation to accurately forecast your accounts receivables? Speak to a specialist today.