Want To See Your Financial Future? There’s No Crystal Ball Needed

Shaun Jex

It may not be possible to predict the future — especially during a pandemic — but planning ahead for your company has never been more important. 

This is why cash flow forecasting is essential. By predicting the movement of money in and out of your business, not only is it easier to anticipate any financial challenges, but it’s also key to building a successful long-term strategy.

Creating a Sales Forecast

To get a clear vision of tomorrow, you have to start with a glance backward. The first step to predicting AR is examining historical data to create a sales forecast.

In general, you can look at your sales for a given period of time — be it a month, quarter, or year — and assume that your future returns will remain stable (but hopefully, be much higher!). However, this only gives you a very general idea of what you can expect. It doesn’t factor in seasonality, changes in demand, or other variables.

You’ll want to consider any notable circumstances that may have taken place during the period you are analyzing. Did your company have any significant price changes? Did you acquire a substantial number of new accounts? Were there factors in the economy or market that may have impacted behaviors?

Your forecast will also benefit from the use of predictive analytics, which uses technology to incorporate things like data mining, statistics, modeling, machine learning, and artificial intelligence to analyze data.

How Do You Eat an Elephant?

The answer? One bite at a time. Try to swallow the whole thing at once and you’ll never manage. You can apply the same approach to forecasting. Attempting to analyze your entire accounts receivable in one serving is needlessly difficult, and will provide you with very few actionable insights.

When examining historical data, it is useful to organize your customers into subcategories. Segmenting them by criteria like size, and creditworthiness will help you pinpoint specific problem areas and provide better insight into what you can expect in the future.

Running the Numbers

A quick and easy report to run when looking at your past performance is Average Payment Time (APT). Through YayPay, you can calculate this number through the dashboard. You’ll be given a chart with values calculated as a three-month rolling average of the days to pay for all paid in full invoices during the time period.

You also have the option of viewing the due date versus the last payment date. 

Calculating Your DSO

The next step in the process is determining your days sales outstanding (DSO). YayPay provides a simple calculator to help with the process, or you can use the following formula:

Days Sales Outstanding = (accounts receivable/total credit sales) x number of days in the period being measured

Creating Your AR Forecast

After determining DSO, there is another simple equation for calculating your AR forecast:

Accounts Receivable Forecast = days sales outstanding x (sales forecast/days in the forecast)

When looking at the result, it is important to remember that while an average is a useful statistic, it is not always representative of reality. Variables like late payments can cause deviations, and you’ll want to factor that into your forecast.

YayPay, an accounts receivable automation software, can help you get a better grasp of these variables. It uses artificial intelligence to predict customer payment behaviors with an accuracy of between 83% to 94%.

The software also provides a Business Intelligence module that makes it easy to run reports for things like past payment performance. Looking at those numbers can help you with variance analysis, comparing expected behaviors to actual results.

The Work is Never Done

The business world is always evolving, so your analysis will need to keep up with the changes for the most accurate forecasts. The final step in forecasting is to revisit and refine the process frequently.

You’ll need to look at past assumptions, alter them based on actual results, and factor in new variables that can potentially impact results. AR automation solutions like YayPay provide you with the tools to easily access the real-time data needed for the most accurate results.

To gain more valuable insights on how to optimize your accounts receivable, visit our blog and sign up to get notified for future blog posts and resources from YayPay.