How to Automate Accounts Receivable (AR) Forecasting and Tracking

Published on May 6, 2022

Forecasting is one of the most critical aspects of the accounts receivable process. After all, an accurate cash flow forecast allows a company to know how much working capital will be on hand and make its business decisions accordingly.

Some organizations rely on a standard accounts receivable forecasting formula and work from spreadsheets to project future customer payment activity. But increasingly, companies are automating their accounts receivable functions and discovering that along with streamlining and improving the process overall, their forecasting is much faster, far easier, and more accurate.

What is Accounts Receivable (AR) Automation?

The core components of a standard accounts receivable operation include billing, in which a business sends invoices to customers; collection, in which customers make payments; and reconciliation, in which accounting teams match customer payments against invoices.

Performed manually, each aspect of the undertaking can be lengthy, resource-intensive, and prone to error. Businesses automating the accounts receivable process report drastically reduced time spent on billing and collections, decreased risk, and expedited payment collection.  

What is Accounts Receivable Tracking?

In accounts receivable tracking, a company stays on top of which invoices are coming due to ensure that it receives timely payments from customers. When businesses use automated platforms to track accounts receivable, they can access all accounts in one place, identify payment trends, and run reports to view outstanding balances by size or days overdue. Plus, by digitally tracking the funds coming into their organizations, they create records for regulatory purposes.

What is Accounts Receivable Forecasting?

Accounts receivable forecasting involves calculating the funds an organization can expect to receive from customers within a certain timeframe. The two types of forecasting, long-term and short-term, differ in terms of their degrees of difficulty.

Over the long term, companies can count on most customers to provide payment for the balances they owe. But within a shorter period, there’s less time for customers to accommodate the unexpected circumstances that can result in late payments, making it trickier for businesses to create accurate projections.

How to Forecast Accounts Receivable with a Formula

When creating their own projections, companies often employ the following accounts receivable forecasting formula:

Accounts receivable forecast = days sales outstanding (DSO) x (sales forecast ÷ days in forecast)

To devise a sales forecast for the formula, companies generally draw on historical data. If an organization made a certain amount in a particular month last year, it’s likely to make a similar amount during that month in the current year.

To calculate DSO for the forecasting formula, businesses apply the equation below:

DSO = (accounts receivable ÷ total sales x number of days)

After establishing the sales forecast and DSO, companies can plug the data into the accounts receivable formula to gauge the amount of cash they can expect to receive within the given timeframe. Businesses can apply the formula to any time period, but most use it for monthly or annual forecasting.

How to Improve Accounts Receivable Cash Flow Forecasting

There’s no singular technique that fully addresses the challenges in accounts receivable forecasting, but there are a few steps companies can take to improve the accuracy of their projections.

  1.   Use historic data strategically

Gaining a better understanding of past payment cycles will help businesses more accurately forecast the incoming funds they can expect within a certain timeframe. To do so, companies should identify and analyze:

  • Problem areas, including customers consistently late on payments
  • Payment behavior associated with the largest or most important customer accounts
  • Unpredictable business units, customers, or products affecting receivables
  • Seasonal patterns
  1.   Sort accounts by category

Working with the analysis of past data, companies can organize accounts receivable into the most useful categories for the business. Even for small to mid-sized organizations, tackling accounts receivable as a whole can be challenging. Sorting by company size, credit quality, payment terms, or other relevant classifications can help businesses approach accounts receivable forecasting in more manageable segments.

  1.   Adjust, compare, adjust again

Based on the categorization and analysis performed, companies can adjust their forecasting and also take actions to improve payment collection. Continuing to compare forecasts against actual performance will enable businesses to keep sharpening and improving their forecasting capabilities.

While the steps above are helpful in organizing and analyzing customer accounts for forecasting purposes, more and more companies are moving the entire accounts receivable process to automated platforms for greater speed, efficiency, and scalability. And when it comes to forecasting capabilities, automated solutions can also sharpen the accuracy of an organization’s projections.

Automate Accounts Receivable Forecasting for Speed and Accuracy

By employing well-designed process flows and, in some cases, predictive analytics capabilities, automated platforms can significantly improve the quality of an organization’s accounts receivable forecasting. Plus, by automating its process for forecasting accounts receivable, a business can:

  • Decrease risk. Automating the forecasting process minimizes the chance of human error and improves confidence in the analysis.
  • Boost efficiency. With automation, accounting teams can perform accounts receivable forecasting far more quickly and easily.
  • Accommodate many data sources. No matter how many accounts are involved in a company’s process, an automated platform can rapidly analyze the data used in forecasting accounts receivable.

Optimize Your Accounts Receivable Analytics with Invoiced

With Invoiced A/R Cloud, companies are automating the entire accounts receivable process from invoice to cash—including forecasting. Our cloud-native platform analyzes invoice, autopay, payment plan, promise-to-pay, and customer payment history data to provide advanced insights on trends and forecast future payment activity. Find out more about the Invoiced A/R Cloud solution’s forecasting capabilities.

Want to learn more about automating your accounts receivable process from start to finish? Our primer covers the most effective tools, services, and techniques. Check out The Ultimate Guide to Automating the Accounts Receivable Process now.

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