A large portion of a company’s cash flow is tied to its accounts receivable. If customers don’t pay within the agreed upon terms, the business could fall into serious cash flow problems and even go bankrupt.
Forecasting accounts receivable is a challenge because it involves estimating and tracking data. Despite this, it is an important skill that small business owners should have.
Sales Forecast
The sales forecast is an essential part of your business’s operations. It gives you a better understanding of what your future sales look like, which enables you to make decisions about resources, hiring, quotas, and costs.
Creating accurate forecasts for accounts receivable is challenging, because customers have different payment cycles. Some pay within a day or two of receiving an invoice, others take longer to collect their cash, and some customers don’t pay at all. In addition, some customers delay paying due to internal supply chain issues, financial reporting requirements, or a host of other reasons.
To accurately forecast accounts receivable, companies need to track customers’ payments, including when they’re late, how long they’re late, and whether they’re paying on credit or by check. They also need to keep tabs on how their competitors are performing and anticipate any changes that might impact their own performance.
For example, if one of your competitors rolls out a new feature or updates its pricing model, that could influence the way that you sell your product. It may even affect your ability to attract new customers.
In most cases, your accounting team will be able to run an aging report to determine the average number of days it takes for customers to pay their invoices. They can also use this data to plug into an accounts receivable formula that will tell them the amount of cash that they should expect to receive in a given time period.
The standard modeling convention for accounts receivable is to tie the amount of cash that a company expects to receive with their total revenue. This approach is a good way to ensure that the sales forecast isn’t impacted by customer payment patterns.
It’s important to update your sales forecast regularly, especially if you’re going through a period of rapid growth or are introducing new products or services. This will help you stay on top of how your sales numbers are performing and spot any problems before they become major obstacles for your business.
DSO
DSO is a key metric for assessing accounts receivable, as it shows how many days it takes to collect on sales. It can help businesses manage their cash flow and understand how to get paid quicker.
DSO can be calculated in a number of ways, but the most common method is to divide total sales for a given period by total credit sales and then multiply that result by the number of days in the period. The higher the DSO, the slower the company will recover its collections.
A high DSO can be a sign that your business is having trouble collecting on its invoices, or that the collections process is not working well. The best way to prevent this is to establish clear payment terms, communicate with customers regularly and follow up on past-due invoices promptly.
Another way to improve DSO is to implement a credit check process before extending credit to new customers, and offer longer terms to those who are already creditworthy. This can reduce the number of customers with outstanding invoices, which can lower DSO and improve cash flow.
In addition, a business can use a collection automation platform to identify at-risk customers and follow up with them in a timely manner. This can be especially useful for late-paying customers, who may be experiencing financial difficulty or are unhappy with your products and services.
A low DSO can be a positive sign that your AR process is performing well, as it indicates that you have a good handle on your cash flow and are able to pay employees and suppliers on time. However, it’s important to be aware that a low DSO can also indicate a lack of financial resources, which can lead to trouble for a company.
It’s best to look at DSO trends over time, rather than just looking at a single DSO value for a given period. Seasonality can make identifying DSO trends more difficult, but a consistent dip in DSO during a particular season each year could be a sign that your company is operating at a healthy level.
Cash Flow Analysis
Forecasting accounts receivable is an important component of cash flow analysis. It provides head office finance and treasury teams with information about the amount of cash they expect to receive in the future.
Accounts receivable is a critical business asset because it generates revenue from invoices and can be used to provide a source of funding for the company in times of need. It’s also an essential part of a company’s financial health, as it can help predict how well a business will be able to pay its bills in the future.
When a company forecasts accounts receivable, it should consider the average days sales outstanding (DSO) for the period. DSO is a key performance indicator that measures how long it takes customers to pay their invoices on average, which directly impacts a business’s cash flow.
Another critical element of cash flow analysis is the cash flow statement, which shows a company’s net cash inflows and outflows over a certain period. This allows businesses to measure their overall financial health and make informed decisions about how best to spend or invest their cash.
The cash flow statement includes three main types of cash flows: cash flow from operating activities, cash flow from investing activities, and cash provided by financing activities. Each of these categories is important to track and analyze for a company’s financial health.
Generally, cash flow is positive when it comes from selling products and services to customers or making investments that benefit the company. However, negative cash flow can indicate a problem. It may be caused by a company that’s struggling to pay off debt or is relying on loans to keep its operations running.
In this scenario, the company can take steps to prevent this situation from occurring in the future. For example, they can secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms with vendors, contact late-paying customers to speed up the collection of their receivables, or take other cost-cutting measures to reduce overhead expenses.
Cash flow forecasting is an ongoing exercise that requires a high level of accuracy and analysis. It’s not just a one-time process that can be done with spreadsheets or other tools, but rather an ongoing, strategic effort that requires data coordination from AR, AP and ERP. It requires the ability to analyze data in real time so that business leaders have a clear picture of where their cash is at any given point in time.
Key Performance Indicators
Managing accounts receivable is one of the most critical processes for any business. It can either stymie cash flow and growth or drive it forward. As such, it’s essential to be able to forecast accounts receivable correctly and efficiently.
When you’re forecasting your accounts receivable, you need to be able to identify potential bottlenecks and monitor performance. This means tracking the right Key Performance Indicators (KPIs) and measuring them consistently.
There are many different KPIs you can track for your accounts receivables. Some of the most common include day sales outstanding (DSO), average days delinquent (ADD) and bad debt ratio.
Another metric is accounts receivable turnover ratio. It’s a measure of how quickly you collect the average amount owed to you by your customers. A high number indicates that you are collecting more often from your customers and it helps improve your cash position.
A low ARTR can indicate that you are not extending credit to the right people or that your collections team is not pursuing overdue invoices. This can impact your ability to grow and expand and may result in lower sales, fewer new customers or even a loss of market share.
The ARTR can also be compared to the collection efficiency index (CEI). This is a metric that measures how effectively you collect all of your credit sales within a period. This is a valuable tool to use when you’re monitoring the health of your AR team and its overall performance.
Lastly, you can use the ARTR to gauge how much cash you can expect to have in your bank account at any given time. This can help you determine which accounts you need to focus on if you want to increase your cash flow.
The right AR dashboard is a powerful way to gain continuous visibility into your company’s accounts receivable process. These dashboards display important summary data, alerts and trends to keep your team focused on key tasks. They also provide a unified and intuitive interface that’s easy to use. They can be customized by role and can integrate with your accounting system to display real-time data.