Accounts payable is a leading indicator of the entire amount of upcoming liabilities, including supplier payments.
Accounts payable entries are directly connected to companies’ cash cycles. When creating a cash forecast, treasurers need to calculate based on days outstanding or the average number of days required to get paid (accounts receivable), sell finished goods currently on hand (inventory), or pay companies short-term liabilities (accounts payable).
The main role of forecasting accounts payable is to prevent cash flow from unexpected disruptions. It also provides information on liabilities (costs and debts) that helps with cash management. Additionally, It helps to optimize how much remains to spend on growth and investment.
Days payable outstanding (DPO) determines the average number of days required to pay a company’s expenses and liabilities.
A high DPO is generally beneficial to a business. If a business needs longer to pay its creditors, the extra cash on hand can be used for short-term investing. On the other hand, a low DPO may imply that a business is not taking full advantage of the credit period provided by creditors.
Higher DPO numbers, while desirable, may not always be favorable for the business since they can indicate a cash shortage and inability to pay.
Accounts payable forecasting assists to fine-tune your payment patterns. It captures essential incentives such as early payment discounts when desired. This leads to maintaining a healthy working capital ratio while preserving vendor relationships.
Accounts payable forecasting is accurate in the short-term, up to the next 2 to 4 weeks. However, due to the uncertainty surrounding payments, accuracy suffers in the long run. With the limitation of spreadsheets, treasurers also have to deal with the unpredictability of accounts payables while creating a cash forecast.
Here are the following barriers while creating account payable forecasts manually:
These certain expenses tend to increase, which affects the accuracy of the cash forecast.
Here are some best practices to improve accounts payable forecasting:
An accurate A/P forecast gives key insights into how much working capital will be available for innovation and growth once debts are paid.
Cash flow analysis tools assist in avoiding last-minute hurdles. Proper cash flow analysis tools help to stay financially stable by planning outlays on capital expenditure in advance.
Here are some key benefits of the HighRadius cash flow forecasting system:
An AI-based cash flow forecasting system would compare historical and recent data and run scenarios using different AI algorithms, selecting the most optimistic and realistic cash prediction to produce an accurate A/P estimate. This allows the treasurer to anticipate expenses that may happen throughout the forecast period and cost fluctuations.
A leading global children’s entertainment company with a revenue of $155.3 crores was facing challenges in its account payable forecasting:
They received the following advantages with HighRadius cash forecasting software:
Get in touch with our solution experts to learn how to use the AI cash flow forecasting system to increase A/P forecasting accuracy.
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.