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Accounts Receiveable Forecasting Accounts
Receivable forecasting is an often misunderstood and ignored process.
Simply using last month's or last years as a benchmark when creating a
forecast isn't enough for the pro-active credit manager. Following are
some guidelines and thoughts about the process that include topics such
as purpose, time periods, and formatting ideas Purpose
of the Forecast There should
be general acceptance as to why the forecast is being prepared. This included
understanding: Who are the users of the forecast? Who is asking for the
information? What will the forecast be used for? What is the purpose of
each forecast? Forecast
Time Periods The time
horizon and the regular reporting periods are key decision items. For
instance, if the forecast is to be prepared monthly, it is important that
it be coordinated with regular accounts receivable reporting so it does
not create extra work for everyone and so it takes the most updated information.
It should tie in to reported figures. This means that there will probably
be some time delay necessary after normal accounting closing to provide
the data. The time horizon is an important factor, but it is usually set
when the forecasting system is first designed. For instance, the forecast
may be for daily collections for the next week, weekly collections for
the next month, monthly collections for the next year, or quarterly collections
for the next two to three years. Obviously, the length of the time horizon
will have an influence on the desired accuracy of the forecast and the
amount of work required to prepare the forecast regularly. Responsible
Departments and Staff Establish
a focal point for your forecasts: i.e., is it corporate treasury, or are
you going to try to forecast for each major operating area? Who has the
information needed to successfully complete the forecast? Analysis
of Current Process Define the
forecasting process for your company (if you already have not). Assess
whether the process is sufficient. Have changes in your company's structure
influenced the current forecasting process? Review major problems, shortcomings,
and strengths of the current system, planning to keep the good and throw
out the bad. Will the process need to be changed? What were the lessons
learned from the last forecast? How will the lessons be incorporated? Level
of Detail and Accuracy Can the forecast
be produced regularly and reliably? What is the level of detail required?
For example, does it need to be at the country, region, product, or company
level? Are total amounts enough or will each number need to be broken
out into more detail? How will the accuracy or lack of accuracy be accounted
for? Shorter-term forecasts differ from longer ones in that they will
usually require higher degrees of accuracy. This is because their time
periods are smaller, which means that there is little time to recover
from or accommodate widely inaccurate estimates that could have severely
negative effects on the tactical decisions being made on the basis of
the forecast. Longer-term estimates, on the other hand, may not need such
accuracy as they are used to make more strategic decisions. Forecast
Data Format The format
of the forecast is the way in which the estimates are presented. For example,
shorter-term forecasts including those up to one year, are often more
meaningful if they are presented in a receipts and disbursements format,
which shows the cash flows in common terms. The opposite of this type
of format is a financial statement format, which may look like a statement
of cash flows or extracted items from a balance sheet and/or income statement.
This type of format is fine for longer-term forecasts, such as those for
longer than a year, but it is very confusing and difficult to work with
for shorter forecasts. Some senior managers may be accustomed to this
format and may suggest using it for shorter forecasts, but it can provide
estimates that are not understandable or that cannot be reconciled easily
with actual data. |
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