Stay Ahead of the Game With These 4 Expert Tips for Accurate A/R Forecasting

25 May, 2023
5 min
Gerry Daly, AVP Product Strategy - Treasury

Listen to the blog:

10:32

Table of Content

Key Takeaways
Introduction
What is the importance of forecasting accounts receivable?
Why is it challenging to forecast cash for accounts receivable?
Factors causing unpredictability in A/R
Challenges in accounts receivable cash forecasting
Tips to improve accuracy in A/R forecasting
Conclusion
FAQ

Key Takeaways

  • Understand the key challenges faced while forecasting A/R and learn how to overcome those challenges
  • Discover game-changing tips to improve accuracy and stay ahead of the competition and take your A/R forecasting to the next level
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Introduction

Picture this – you’re running a business and you want to make sure you have enough money coming in to cover your expenses. That’s where AR forecasting comes in. It’s a fancy way of saying that you’re trying to figure out how much money you’re going to get from your customers in the future. By doing this, you can plan ahead and make sure you have enough cash on hand to keep things running smoothly.

Accounts receivables forecasting is especially important if you rely on your customers to pay you on time. Knowing when you can expect to get paid helps you make decisions about how to spend your money. For example, if you know that you’re going to have a lot of money coming in next month, you might decide to invest in new equipment or hire more staff. 

What is the importance of forecasting accounts receivable?

AR forecasting can help you identify potential problems before they become big issues. If you notice that your customers are taking longer than usual to pay their bills, you can take action to speed up the process and avoid cash flow problems down the line. 

Example

Company A got $400,000 of its due money and needs to drain its bank account to meet its monthly payments. This left it $25,000 short on cash. The company could have reduced other expenditures or pursued low-interest loans if it predicted A/R beforehand. It realized that it needed more funds only days before its payments were due. This raised the demand for quick funding, which affected the bottom line.

To avoid such adverse scenarios, effective accounts receivables management is crucial. Moreover, it is crucial that you monitor A/R since it is one of the key drivers of measuring your company’s liquidity. Failure to track accounts receivable leads to a high DSO, thus, negatively impacting your financial situation. Moreover, proper accounts receivable management is critical to decrease bad debt and add to your company’s profit. 

A/R management becomes easier with an AI cash flow forecasting system. Accurate A/R forecasting helps optimize liquidity for:

Distressed Businesses

  • They can perform daily and accurate forecasting to estimate available cash
  • They can work with banks to make credit revolvers more flexible
  • They can adopt a collecting strategy that is aggressive for all clients

Cash Deficit Businesses

  • They can borrow in advance with short-term forecasting
  • They can check the available balances in credit revolvers and commercial papers
  • They can adopt a more aggressive A/R collection strategy for high-risk consumers

Cash Surplus Businesses

  • They can understand the accuracy of the industry’s benchmarks
  • They can help the CFO’s office make better quarter-end business decisions
  • They can use technology to identify and use excess cash for investments

Why is it challenging to forecast cash for accounts receivable?

Accounts receivable forecasting is difficult since it is dependent on the clients. Customers may not always stick to agreed-upon payment terms. This adds an element of uncertainty to the process. A/R is the most challenging category to forecast for treasurers.

Accounts receivable management becomes increasingly difficult as a company grows larger. For an enterprise, it becomes complicated due to scattered data across many business units. Companies may face various issues, including poor receivables administration and time-consuming reporting processes. Several factors increase the unpredictability in A/R forecasting, leading to low accuracy.

Factors causing unpredictability in A/R

Some of the major factors that can cause unpredictability in accounts receivable (A/R) include seasonal trends, business cycles, credit score, unpredictable customer payment behavior, and disputes and discounts.

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Seasonal trends

Seasonal trends refer to the fluctuations in business activity and cash flow that occur throughout the year. For example, a retailer may experience a surge in sales during the holiday season, which can impact their A/R balances. This can make it difficult to predict cash inflows and outflows, leading to unpredictability in A/R.

Business cycles 

Business cycles can also impact A/R, as economic conditions and industry-specific factors can impact customer payment behavior. For example, a business operating in a cyclical industry may experience fluctuations in their A/R balances as demand for their products or services changes over time.

Credit score

Credit score is another factor that can impact A/R unpredictability. Customers with poor credit scores may be more likely to default on their payments, leading to delays or losses for the business. On the other hand, customers with good credit scores may be more reliable, leading to more predictable A/R balances.

Customer payment behavior 

Customer payment behavior can also impact A/R unpredictability, as customers may pay their bills late or not at all. This can create cash flow problems for the business, as they may not have enough cash on hand to cover their expenses.

Disputes and discounts

Disputes and discounts can also cause unpredictability in A/R. Disputes over invoices or services can lead to delays in payment, while discounts offered to customers can impact the amount of cash inflows the business receives.

Challenges in accounts receivable cash forecasting

Forecast inaccuracy due to spreadsheet restrictions and errors

There is room for human error in spreadsheets. It is also time-consuming to compile data from many spreadsheets to one master sheet.

Scattered data across various data sources

Manual data mining from sources like ERPs, banks, and FP&A systems makes data gathering tedious.

Economic volatility

The unpredictability of market dynamics creates inaccurate forecasts.

Inconsistent customer payment habits

Payment methods and market size vary across customers and businesses. Spreadsheets are unable to track several customer behaviors and patterns. Without adding many customer-specific variables, the forecast accuracy reduces. As a result, payments may not arrive as anticipated.

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Tips to improve accuracy in A/R forecasting

Here are a few tips for enterprise treasury leaders to improve A/R forecasting accuracy:

Conducting historical data analysis

A careful analysis of previous A/R forecasts helps identify patterns that are likely to continue in the future. A few key points while analyzing this data include:

  • Seasonality in the workplace, both a high-level overview and a more comprehensive report
  • Payment habits of the high-risk customers

Creating subcategories for accounts receivable

Based on historical data analysis, accounts receivable may be subdivided into subcategories. The sub-categorization aims to refocus improvement efforts on the error-prone areas. The following are examples of subcategories:

  • Date of payment
  • Terms of payment
  • Size of the client
  • Credit score of the customer

Observing and tweaking assumptions

To improve A/R forecasting, it’s necessary to test and change assumptions frequently. In a short period of time, monitoring, updating, and iterating processes convert a prediction from poor to high quality.

Using artificial intelligence in accounts receivable

“Using artificial intelligence in accounts receivable can offer significant benefits for businesses. By automating the A/R forecasting process, businesses can improve their cash management, reduce the risk of cash flow problems, and make more informed decisions about their financial performance.

Spreadsheet-based cash flow projections only generate two-dimensional tabular reports. But, AI-enabled cash forecasting provides treasurers with a 360-degree view of the present, historical, and future data. This enables them to make informed business decisions.

HighRadius’ AI-powered Cash Flow Forecasting Software provides real-time data with high visibility. So, it gives more accurate results than manual forecasting methods.The following are the benefits of using HighRadius cash forecasting system:

  • Makes precise short and long-term cash forecasts
  • Get real-time revision of cash forecasts
  • Compares historical cash flow data to current estimates and finds potential areas for improvement
  • Achieve granular visibility into A/R cash flows
  • Uses the best-fit algorithm to analyze many characteristics describing client payment behaviors
  • Improves accuracy up to 95% in predicting payment dates

Conclusion

If you really want to take your AR forecasting to the next level, you should definitely leverage advanced technologies, such as artificial intelligence. Not only can it save you time and offer more accurate predictions, but it can also provide real-time insights and customizable reporting. Consolidating your cash inflows and outflows data with AI can reduce the time it takes to create forecasts from days to minutes. Moreover, AI-powered scenario analysis can decrease your financial risk. With this powerful tool, you can simulate the financial outcome of different business decisions, like increasing expenses, losing a major customer, or taking out a loan. By assessing different strategies in advance, you can get a clearer picture of the potential impact on your cash flow and make more informed decisions for your business. This can help you make critical decisions faster when it comes to cash repatriations, pooling, and hedging over the short and long term. By streamlining your forecasting process, you can stay ahead of the game and make informed decisions with ease. 

So, if you’re serious about improving your cash management and reducing the risk of cash flow problems, consider implementing a fully automated A/R forecasting software. With the power of AI on your side, you can take your business to the next level and achieve greater financial success.

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FAQ

What are the benefits of utilizing artificial intelligence in AR collections?

AI in accounts receivables streamlines processes, improves accuracy, speeds up payments, reduces risks, provides insights, and enhances customer experience. By leveraging AI in accounts receivables, businesses can optimize financial operations and drive greater efficiency in managing receivables.

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