Being a finance manager involves knowing how to forecast accounts payable, manage your cashflow and streamline payment processes. Let’s talk about accounts payable forecasting in this blog.
What Is Accounts Payable Forecasting?
Accounts payable (AP) forecasting is when you estimate the upcoming outflow of accounts payable within a certain period. This process helps companies foresee the timeline and extent of future invoice payments. When done right, AP forecasting prevents unexpected costs for the business.
AP forecasting starts with analysing historical data and existing financial obligations. Doing so helps the business anticipate future payments and manage its budget.
Formulas to Forecast Accounts Payable
By employing the right formula to forecast accounts payable, businesses can predict their future liabilities, ensuring they maintain liquidity and meet their financial obligations without disruption. Understanding these formulas is essential for maintaining a healthy financial status and supporting strategic growth.
1. Total Accounts Payable Turnover (TAPT)
TAPT gauges the efficiency of your AP management by examining your purchases versus your AP.
This is calculated by dividing your total purchases by the average of your starting and ending AP for a certain time. This average is then divided by 365 (the number of days in a year) to get the days payable outstanding (DPO), which is the average number of accounts payable days.
2. Days Payable Outstanding (DPO)
Using DPO to forecast accounts payable is a helpful method you can use. A DPO is a financial ratio showing the average time a company takes to pay its bills and invoices to its suppliers.
Below are the steps to get your DPO:
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- Get your average AP by adding the starting AP to the ending AP and dividing the total by 2.
- Identify your total purchases for the relevant period.
- Calculate: (Average AP you got in step A) divided by (Total purchases divided by 365)
Benefits of Forecasting Accounts Payable
By predicting future payables with accuracy, organisations can better manage their cashflow. Below are some benefits of forecasting AP.
1. It improves supplier relationships
Accurate forecasting ensures that a company can meet its payment obligations on time, which leads to a healthy relationship between the company and the supplier. Since suppliers appreciate prompt payments, it can lead to better terms and conditions such as discounts and extended credit periods. Forecasting accounts payable also allows the company to properly communicate timelines and payment schedules to reduce uncertainties and strengthen relationships.
When suppliers see that the company is committed to responsibly managing finances, they develop more trust towards the company and are more likely to offer favourable terms or prioritise the company’s orders.
2. It avoids possible money crises by predicting future cashflow
Crises oftentimes happen because we weren’t able to premeditate them. When businesses don’t forecast their accounts payable, they end up depending only on incoming payments to clear their expenses. If a threat suddenly arrives, they must have enough money to mitigate the risks.
On the other hand, if they had a clear vision of their cashflow from the get-go, any unforeseen events could be handled with grace. Companies can set aside enough cash in advance, schedule payments to align with the movement of cash and avoid the need for emergency borrowing.
3. It enhances working capital and improves cashflow
Your working capital is the money your business has after all its current liabilities have been accounted for. It’s what the business uses to manage short-term liabilities, so it only makes sense that it will keep swinging back and forth if you don’t forecast your expenses.
When you do AP forecasting, you maintain positive cashflow and enhance your working capital because you have a better view of your monthly expenses and how much is left.
4. It attracts investors
Investors prefer and are attracted to businesses with excellent financial vision. Doing accounts payable forecasting demonstrates your business's financial stability and strategic foresight, building investor confidence.
Investors will also see your company's commitment to operational excellence. When businesses meet or exceed their financial projections, it reinforces investor confidence in the management team's ability to achieve long-term goals.
5. It ensures smooth operations
When you accurately predict your cashflow, you have the working capital to cover your short-term liabilities. AP forecasting provides a clear view of upcoming payments, allowing you to manage your business’s cashflow more effectively. Since you were able to foresee when and how much cash will be needed to cover liabilities, you can avoid cash shortages and ensure you have enough funds to meet your obligations.
Furthermore, you get to plan and prioritise expenditures, ensuring that funds are available for critical operations and investments.
6. It helps your company make decisions
Forecasting your accounts payable gives you a clear understanding of your financial commitments. That way, you get to make more informed decisions on cashflow management, resource allocation and budgeting.
For example, in budgeting, accounts payable forecasting provides detailed information on expected expenses. This helps your business’s decision-makers set realistic budgets and financial plans. The business can then allocate resources effectively and avoid overspending.
Track Your Forecasts With Accounts Payable Software
Accounts payable software doesn’t just exist to streamline invoice processing and payment tracking. It also provides valuable insights into your cashflow, helping you make informed decisions and plan for the future with confidence. When you use the software for accounts payable forecasting, you can proactively manage expenses and ensure the financial health of your business.
