How To Forecast Accounts Payable?

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Accounts payable is one of the many line items that you can forecast for your business, and it is an essential process that you need to know how to do so that you can effectively manage it.

The AP is undoubtedly one of the largest costs for many companies. AP is the amount of cash your business owes to other players in a business transaction such as the suppliers. Forecasting the amount of AP that you expect in the future can assist with working capital management and guarantee the sufficiency of funds to meet AP when they are due for payment. This article aims to give you pointers as well as techniques on how to improve your accounts payable forecasting.

Why Forecast Accounts Payable?

There are several important reasons to create accounts payable forecasts:

1. Enhance control over cash flow- By forecasting the future AP obligations, it is possible to have better control of the cash flow in the business enterprise. This also helps to avoid situations where you are stuck with unexpected cash flow shortfalls that may be detrimental to business.

2. Inform Budgets and Planning - The detailed AP forecasts are used in providing purchase and operating budgets for all the units in the company. It is therefore commendable to prepare realistic AP projections in a bid to make accurate budgetary projections.

3. Substantial Cost Management - This provides the opportunity to strategically source AP spending for certain vendors/ expense categories, depending on their fluctuations or trends in spending.

4. Track AP Cycles – Tracking changes in AP cycles can help in identifying vendors who may be allowed to be more lenient in payment terms. This could be a signal that there are problems for those vendors that one has to strategize for.

Methods of Forecasting AP

On the same note, several strategies have been used by various companies to predict future accounts payable liability. Common methods include:

1. Historical Trends - Calculate the weekly or monthly sum of all AP for the past year and compare the results to the previous year or the previous two years. Maintain the historical proportions or proportions of the amount.

2. Purchase Forecasts: A purchasing department should prepare balanced forecasts of the expected procurement costs for the year every month. Link these forecasts to average AP cycles based on different categories of the goods and services being purchased.

3. Age Analysis of AP – Review the outstanding AP amounts at present and the usual payment period of the corresponding invoices. Pay-30 represents the number of payments made within the past 30 days while pay-60 represents the number of payments made within the last 60 days but not within the 30 days, and finally, pay-90 represents the number of payments that were made over the past 90 days or more and not within the 60 days and finally past due represent the number of payments that are due.

4. Supplier Contracts – This should involve reviewing existing supplier contracts and purchasing contracts to determine if there are already agreed future changes in pricing, quantity, or payment terms that will affect future AP.

A few recommendations that can help in improving AP forecasting are as follows;

Follow these tips for reliable accounts payable projections:

- Set forecasts about other indicators of procurement such as PO commitment rate rather than basing on AP spend alone.
- Make sure the forecast takes into consideration new suppliers, changes in supply contracts,s and or changes in the organization’s procurement policies.
- Burst down the forecasts by division/department and, possibly, major vendors if they are included in the AP.
- Include the forecast error, or uncertainty component, in the forecast by adding a contingency factor or a confidence interval from previous periods.
- For the forecasting models that are in place, try to automate them whenever feasible with the help of accounting software. But still, ensure that the top-down forecasts are compared with bottom-up projections.
- Create a full rolling budget for the next twelve months which should be updated monthly depending on the actual performance.
- Perform a variance analysis of the forecasts with the actual results that were achieved over each period and then segment the results to individual vendors or products/Services.

Thus, by closely adhering to the logical and factual approach for estimating future accounts payable, organizations can reduce most of the elements of the surprise in the cash commitment resulting from the AP. Proper forecasting ensures that working capital determinations are made with precision, cash flow is effectively managed, and the level of transparency obtained on spending throughout the procurement function is enhanced. With these methods, the finance teams can accurately create AP forecasts that can be used in strategy and operational planning.

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