A company’s accounts receivable balance represents the money that it has earned from customers by providing them with goods and services that they have not yet paid for.
Accounts receivable is one of the most important balance sheet line items for companies to understand and forecast. Knowing how much cash a business has available can help them make decisions about expansion, operations and financing.
Accounts receivable
Accounts receivable (A/R) is the amount of money that a company owes its customers for goods or services they have purchased on credit. These accounts are a crucial part of a business’s working capital.
Accounts receivable forecast depends on the number of moving parts because each customer has different payment habits.
The more data you have about the customer’s history, the more accurate your forecasting will be. It also helps to sort your accounts receivable into categories based on company size, credit quality, and other factors that help you make more effective decisions.
Short-term AR collections forecasting is important to businesses because it can affect how they use cash in the future. It can also reduce a company’s reliance on external financing facilities.
Days sales outstanding
The number of days sales outstanding (DSO) is an important indicator for managing the accounts receivable process. It shows how efficient a company’s credit and collection processes are, how quickly payments are received and whether customers have problems paying their invoices.
A high DSO indicates that a business is not collecting payments from customers efficiently. In turn, this can result in cash flow issues.
To calculate DSO, a company needs to divide its final accounts receivable balance by its total credit sales for the period. However, cash sales transactions are usually kept out of this calculation.
A lower DSO indicates that a company is more efficient at collecting cash payments from its credit sales, which helps improve its free cash flows. Generally, DSO values vary greatly by industry and the underlying terms of payment granted by customers.
Sales forecast
Sales forecasting is a critical aspect of any business, regardless of industry or size. It’s the basis for a number of crucial decisions, from hiring and resource management to goal-setting and budgeting.
When done properly, it can make your org more successful. Accurate sales projections give you a sense of how much cash your company will have available for investments that drive growth, like new technology or training.
If your company sells physical products, it’s also vital to predict how much inventory you’ll need to keep on hand. Properly balancing inventory levels is the key to avoiding overstocking and understocking, which can cause financial problems later on.
There are a few important factors that influence sales forecasting, including your business model and the quality of your sales data. It also depends on broader industry and market trends.
Variance analysis
Variance analysis is an accounting process that assesses the difference between a business’s planned and actual sales, costs, or revenue. This analysis can help a business identify issues with its forecast and determine corrective action.
In the case of accounts receivable, variance analysis can help a company understand its customers’ payment habits and predict future collections. It can also reveal problem areas that require further investigation.
Depending on the nature of the variance, companies may choose to categorize it as favorable or unfavorable. Favorable variances may include cost savings, while unfavorable ones can be caused by a material shortage or labor costs that are higher than expected.
In the example of a manufacturing company, a material variance would be the difference between the actual price of materials and the standard price of the same quantity of raw materials. The same applies to the rate variance for labor.
