How to Forecast Accounts Payable

  • 17 Jun 2022
  • AP Automation
How to Forecast Accounts Payable Image

The accounts payable turnover ratio is a crucial indicator of an organization’s financial well-being. Accurately forecasting accounts payable helps management gain control over payments and cash flow.

Additionally, paying invoices on time ensures solid supplier relationships, timely production, and a strong brand reputation. Discover how to forecast accounts payable so you can take advantage of money-saving benefits, such as discounts for paying suppliers early.

What is AP forecasting?

Accounts payable refers to short-term liability, which are the obligations the organization must pay off within one year or less. Understanding these debts and costs and when they must be paid in full is the groundwork for effective cash flow forecasting and management.

Also, AP forecasting ensures a business is well-prepared for production requirements in a constantly changing marketplace. Automation provides real-time financial information to make crucial decisions to avoid production delays and business interruptions. 

How do you calculate expected accounts payable?

Determining the expected accounts payable requires a calculation formula called the total accounts payable turnover (TAPT). To figure out the TAPT, start with total purchase divided by beginning AP plus ending AP. Next, divide that number by 365 to determine the average accounts payable days/DPO.

Calculating expected accounts payable helps organizations stay ahead of the curve to remain relevant and profitable in an evolving global economy. Cloud automation encourages collaboration for transparency and visibility. Focus on standardized methodology and all relevant cost data beyond the cost of goods sold (COGS) to strategize based on the organization’s needs and goals.

How do you use DPO to forecast accounts payable?

Understanding the days of payable outstanding (DPO) helps management and the AP team find ways to streamline operations and improve cash flow. The figure out the DPO, use the formula DPO = Accounts Payable X Number of Days (COGS). 

Next, review why the organization’s goal is a high DPO versus a low DPO. For example, a company may maintain a high DPO to have the additional cash flow for investments. On the other hand, establishing a low DPO helps companies realize discounts for early payments and build strong supplier relationships. In addition, AP automation reduces the time it takes to pay invoices, improving efficiency and helping companies save money.

Use automation to streamline accounts payable forecasting

Adopting complete AP automation streamlines AP forecasting to gain financial control to avoid business interruptions, delays, and brand damage. On the other hand, partial automation leaves room for human error and is not fully accessible by remote workers. Additionally, organizations realize a measurable ROI for AP automation solutions.

Cloud automation provides a secure and collaborative environment with controlled access. As a result, invoice approvals can be done in seconds or minutes rather than days or weeks. In addition, real-time data goes beyond the basic balance sheet to help the AP team and C-suite find ways to improve cash flow and working capital management. 

Figuring out how to forecast accounts payable matters to your organization’s bottom line. AP automation simplifies workflows and provides access to real-time data to make time-sensitive decisions. Additionally, the AP team has more time to focus on significant work, such as negotiating discounts for early payment. Contact Medius today to learn more about forecasting accounts payable and gaining greater control over your business’ cash flow.

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