Guide To Improving Accounts Receivable Forecasting Accuracy

Accounts receivable forecasting is an important but challenging component of the cash flow forecasting procedure for treasury and finance teams.

It’s a component of the business’s cash flow forecast that estimates the amount of money it’s due to get over a certain period. Most of these receivables will come from the business’s clients.

In this post, we will highlight some steps for improving the accuracy of accounts receivable forecasts.

Importance of accounts receivable forecasting

Reliable and accurate accounts receivable forecasting will greatly impact the business’ working capital. Clarifying the short-term future account receivables will reduce reliance on short-term exterior financial facilities. So, improved accounts receivable forecasting allows a company to become efficient and nimble with concerns about how they use money.

What makes accounts receivable forecasting difficult

The challenges of the head office crew managing a forecasting procedure are many because of the sheer data volume, several systems and many entities involved. Particularly, accounts receivable forecasting is challenging. It is out of the receiving business’s hands. While payment terms are agreed upon, they might adhere to them all the time.

It’s easy to break down receivables forecasting into two sections: long-term and short-term. Short-term forecasting is hard since there is variability when the bills are settled and also variability when money will be received. Clients might delay payments due to hardships in the supply chain. So, they are holding money for reporting purposes.

 Long-term forecasting is straightforward since clients will eventually pay their bills.

Tips for improving short-term accounts receivable forecasting

Since forecasting is one of the forward-looking activities in a business, no silver bullet can solve all the problems. Here is how you can improve the accuracy and quality of the accounts receivable forecast.

Historic data analysis

Understanding previous account receivable habits is the first thing to do when trying to accurately forecast future client receipts. There is no fast and hard technique for this analysis, but what’s learned is more vital than how it’s done.

  • At the base level, outline the analysis of the history of accounts receivables.
  • Problematic parts within the receivable ledger, like clients who fail to pay to terms consistently
  • The largest clients and their payment pattern
  • The most volatile elements of the receivable ledgers
  • Seasonality at the micro and macro levels

This exercise aims to determine what parts of the receivable ledger cause the most issues and are the hardest to predict. This allows improvement efforts to be channeled on these parts.

Breakdown accounts receivable into sub-parts

The historic analysis facilitates the accounts receivables ledger to be split into different reporting sub-divisions based on the things that need to be focused on.

The common sub-categorization is based on client size. Taking account receivables as one number is hard, even in medium-sized businesses, as it comprises numerous moving parts. 80:20 splits will focus the analysis on the largest clients and their payment patterns.

Additional or further client categories include payment terms, credit quality or score and time of the month or week when the payment is anticipated.

This form of categorization is vital to the efficient analysis of account receivable habits.