How to forecast accounts receivable (2025)

As a small business owner in the UK, chances are you want to:

• Get full visibility of your accounts receivable (AR)
• Business expenses are perfectly aligned with your cash availability
• A clear picture of how much is coming in from outstanding invoices
• Have the confidence that you’re not overextending yourself financially.

This is where forecasting accounts receivable comes in. In this article, we’ll break down what AR forecasting is, highlight the major factors affecting your accounts receivable, and provide a step-by-step guide to forecasting your AR.

Plus, you’ll discover how Wise Business can help you receive payments seamlessly from both local and global customers.

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What is accounts receivable forecasting?

Accounts receivable (AR) forecasting involves collecting and analysing existing payment records, such as outstanding invoices, to understand your customers' behavioural patterns and accurately predict future cash flow over a specific time frame.

Imagine a scenario where Larry and Sons, a small, family-owned electrical installation company for residents based in Manchester, is planning to expand operations to Northampton. To successfully make this move, this electrical installation company needs to ensure it has enough liquidity to cover upfront costs like renting a space, buying equipment, hiring new staff, and marketing.

This is where accounts receivable forecasting comes in. By projecting how much income is expected from outstanding invoices and when it will be received, Larry and Sons can gain a clearer understanding of its future cash flow. This foresight helps it to plan strategically, ensuring they don’t overextend themselves financially.

Generally, accounts receivable forecasting gives you a clear picture of your overall financial health. This way, you understand how much is coming in and the average timeline it takes for customers to pay you. With this information at your disposal, you can manage your cash flow more easily while avoiding cash shortages.

Additionally, AR forecasting allows you to predict when customers will be making payments accurately. This way, you can plan business expenses around your cash flow instead of relying on short-term financing options such as taking loans or factoring your accounts receivable.

AR forecasting also focuses on collecting and analysing your company’s existing payment records. With these records, you have a better understanding of your customers’ behaviours and patterns, which helps you make more accurate predictions about them.

Factors affecting accounts receivable

Below are some of the common challenges that your AR teams can likely run into:

• Slow payment cycles: Dealing with high-risk customers and overdue invoices can elongate the gap between invoicing and collections. This can cause cash flow shortages and force you to take short-term financing options with high interest to fund your business expenses.
• Payment tracking and reconciliation: Using legacy systems such as spreadsheets for manual reconciliation can cause unintended delays. Not only are these systems error-prone, but they are labour-intensive as well. Using legacy systems also makes it difficult to keep track of late payments, match invoices with payments, and have full visibility into your company's receivables.
• Poor customer communication: A communication gap between your AR team and your customers’ AP team can lead to late payments. Without having a collaborative system for communication, it’s difficult to proactively chase payments and resolve disputes on time while still maintaining a good relationship with your customers.
• Industry standards: Industry standards often dictate what the typical payment terms would look like and when customers are expected to pay. Having a clear understanding of these standards helps you set realistic expectations for your accounts receivable.
• Poor credit policies: Granting credits to high-risk customers or not reviewing your customers' creditworthiness periodically can lead to longer collections periods or higher risks of bad debts.
• Economic downturns: Recession or fluctuations in the market can lead to slower payments of invoices. Understanding the market helps you prepare for changes and adapt to them.

How to forecast accounts receivable

Here is a quick rundown of how you can get started with forecasting accounts receivable:

Calculate your accounts receivable DSO

The first and foremost step in forecasting your accounts receivable involves knowing your Days Sales Outstanding (DSO). DSO helps you and your team measure the average number of days it takes for a business to send out an invoice and review payments for the same invoice.

Generally, a higher Days Sales Outstanding means customers are not paying their invoices quickly. On the other hand, a lower DSO signifies that your customers are paying on time.

To calculate your DSO, here’s the formula:

Days Sales Outstanding = (Accounts Receivable ÷ Net Credit Sales) x Number of Days

Going back to our previous example, imagine Larry and Sons made £200,000 in sales in the last four months of 2024 or 121 days. The company, as of December 31st, also had an outstanding account receivable of £18,000.

Using the formula above, here’s how to calculate Larry and Sons’ Days Sales Outstanding:

• Accounts Receivable: £18,000
• Net Credit Sales: £200,000
  Number of Days: 4 months or approximately 121 days.

Days Sales Outstanding = (£18,000 ÷ £200,000) x 121 days= 10.89.

This means that in the last four months of 2024, the average delay between invoice date and payment for Larry and Sons was approximately under 11 days.

Forecast your business sales

The next step is to forecast your business sales. Start by collating your historical sales data. With this data, you can estimate future sales, thereby allowing you to predict your accounts receivable.

Additionally, analysing your historical sales data helps you create more accurate financial forecasts. While doing this, you should also consider other external factors such as:

• Market conditions, such as supply chain issues
• Seasonality
• Customer churn
• Growth rate
• Pricing changes for your product and the needed raw materials

Forecast your accounts receivable

Once you know your Days Sales Outstanding (DSO) and have done your sales forecasts, the next step is to forecast your accounts receivable. You can do this using the formula below:

Accounts Receivable Forecast = Days Sales Outstanding x (Sales Forecast ÷ Time)

Returning to Larry and Sons and its efforts to forecast accounts receivable for the remaining 121 days of 2024, a sales forecast of £300,000, and a Days Sales Outstanding (DSO) of 10.89 days.

Using the formula above, here’s how to calculate Larry and Sons’ forecast for your accounts receivable:

• Accounts Receivable Days: 10.89 days
• Sales Forecast: £300,000
• Time: 121 days

Accounts Receivable Forecast = 10.89 days × (£300,000 ÷ 121 days) = £26,989.12

Larry and Sons can expect to have a future Accounts Receivable of £26,989.12, which would go into its expansion plans at Northampton.

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FAQs - forecasting accounts receivable

Here are some commonly asked questions about forecasting accounts receivable:

What are the common challenges of forecasting accounts receivable?

AR forecasting faces several challenges, such as:

• Scattered data across multiple sources, making it hard to consolidate.
• Prone to human errors when doing it manually.
• Variations in customers' payment behaviours.
• An economic downturn which affects your clients' ability to pay on time.

Can seasonality affect your AR forecasting accuracy?

Yes, seasonality can impact sales, payment patterns, and customer behaviour throughout the year, so it’s crucial to adjust your AR forecast to reflect industry-specific peak and off-peak seasons, ensuring greater accuracy.

What are the risks of relying on manual AR forecasting methods, and how can automation help?

Manual AR forecasting using spreadsheets is time-consuming and error-prone, especially with large invoice volumes and scattered data. Automation tools streamline data consolidation, offer real-time visibility, enhance forecast accuracy, and reduce errors.

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