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Accounts Receivable Forecast

Moneyzine Editor
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Moneyzine Editor
3 mins
December 12th, 2023
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Accounts Receivable Forecast

Definition

The term accounts receivable forecast refers to a calculation that allows a management to plan for the investment in accounts receivable at the end of an accounting period. The metric takes the company's days sales outstanding and multiplies it by the average sales per day in the forecast timeframe.

Calculation

Accounts Receivable Forecast = Days Sales Outstanding x (Sales Forecast / Days in Forecast)Where:

  • Days sales outstanding is calculated as the average accounts receivable / (annual revenue / 365).

  • The sales forecast is the anticipated sales revenue occurring in the period examined, while the days in forecast are the number of days associated with the sales forecast.

Explanation

Liquidity measures allow the investor-analyst to understand the company's long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand the amount of cash needed to support accounts receivable is by calculating a forecast for accounts receivable.

Calculating the accounts receivables forecast allows the finance team to understand how much cash will be tied up in accounts receivable at the end of the forecast timeframe, since other potential investments compete for the same funds. The calculation uses the historical value of days sales outstanding (DSO) and multiplies it by the expected sales per day in the forecast period. The result of the calculation is a forecast of the ending balance in accounts receivable.

Example

The CFO of Company ABC was just informed the sales department is going to run a national promotion that's expected to result in a surge in sales revenue in addition to accounts receivable. In the same timeframe, the company is planning to launch a large capital program involving the construction of a new fabrication plant. The CFO is concerned the surge in accounts receivable will consume too much of the cash earmarked for the capital project launch, so she asked her analytical team to provide a projection of the accounts receivable balance at the end of the promotion.

Her team of analysts first examined data for the last twelve months, and found the starting balance of accounts receivable to be $14,756,000 and the ending balance $16,129,000. Total sales revenue in the same timeframe was found to be $154,425,000. Using this information CFO's analyst team calculated average receivables collection period as:

= (($14,756,000 + $16,129,000) / 2) / ($154,425,000 / 365)= ($30,885,000 / 2) / $423,082= $15,442,500 / $423,083, or 36.5 days

Next, the team took a look at the sales forecast of $25,700,000, which is roughly double a normal month's sales, resulting in an average sales per day value of:

= $25,700,000 / 30 days, or ~$857,000 / day

Using this information the team then calculated the accounts receivable forecast as:

= 36.5 days x $857,000 / day, or $31,300,000

Related Terms

  • The term sales to inventory ratio refers to a calculation that allows a management team to understand the level of inventory needed on hand to support sales. The metric takes the company's annual cost of goods sold and divides it by yearend inventory.
    Moneyzine Editor
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    September 21st, 2023
  • Accounts Receivable (Receivables)
    Also referred to as "receivables," this is the accounting term used to describe claims the company has against others for goods, services, or money. Accounts receivable are usually non-written promises to pay for goods or services received but not yet paid for by a customer.
    Moneyzine Editor
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    November 6th, 2024
  • Days Delinquent Sales Outstanding
    The term days delinquent sales outstanding refers to a metric that allows an investor-analyst, or a management team, to understand the average number of days sales are outstanding for delinquent customers. The calculated rate, expressed in days, takes the average accounts receivable for those accounts that are delinquent and divides it by the amount of sales revenue associated with those accounts occurring in one day.
    Moneyzine Editor
    Moneyzine Editor
    January 15th, 2024
  • Average Receivable Collection Period
    The term average receivable collection period refers to a metric that allows an investor-analyst, or a management team, to understand the average number of days sales are outstanding. The calculated rate, expressed in days, takes the average accounts receivable and divides it by the amount of sales revenue occurring in one day.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024

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