Guide to accounts payable forecasting for your business

Apr 05, 2024

Financial forecasting and planning are instrumental in maintaining your business funds and sustaining them without going bankrupt. But new businesses don’t have the time and resources to do this continually.

As a result, they quickly run out of funds or get into neck-deep debt. Those who foresee and strategize their expenses and do accounts payable forecasting become an exception and witness revenue growth.

They can make a solid budget plan that will work and reap exceptional benefits. Ultimately, this leads them to a place where they have consistent control over their cash flow.

No matter how viable your business model is, without right AP projection, you cannot sail through the desirable path.

What is accounts payable forecasting?

Accounts payable denotes the outgoing and outstanding payments that a company is liable for. It includes bills, vendor payments, and money that a company owes to its suppliers.

Accounts payable forecasting is the prediction of future expenses ahead to plan the cash flow accordingly. This is usually done by finance professionals by taking into account the expenses from the previous months.

They consider various factors such as sales, seasonality, inflation, inventory, raw material requirements, and other factors. Expenses are planned anyway, whether or not you conduct forecasting.

But the data won’t be precise and reliable. On the contrary, accounts payable projection purely relies on historical data and leads to factual and applicable outcomes. 

Benefits of accounts payable forecasting

Forecasting accounts payable can fetch more results than you expect. Here is what it can help small businesses achieve.

1. Enhances working capital

Working capital is the funds your business has to manage its short-term liabilities. This value will keep oscillating if there is no expense prediction.

Also, you will find it hard to allocate and use the available cash resources effectively. Accounts payable forecasting helps in predicting and maintaining positive cash flow and thus promises improved working capital.

You know how much your monthly expenses will be and what will be left after all these expenses. You can take risky steps as you know what the working capital is at any point in the near future.

2. Better supplier relationships

Small business owners must aim for strong supplier relationships, as their support is paramount. This relationship turns sour when the initially discussed terms are not met at both ends or during negotiations with vendors.

Vendor payments hold a huge part of a company’s accounts payable. Lack of cash availability pushes the accounts payable team to put off the bill processing for an undefined time period. 

You can avoid this by forecasting accounts payable and having full control over cash flow. You will never miss payments again and stay on good terms with suppliers.

3. Avoid potential disruptions

Cash crises happen when you don’t premeditate expenses. There is also another category of liabilities that happens unexpectedly.

Without prior planning and forecasting, you will face frequent crises and solely depend on incoming payments to clear bills. If a threat or risk befalls, you must have enough cash in reserve to face or mitigate it before spreading fully. 

Accounts payable prediction gives you a vision and understanding of how much cash will walk in and out at different points in time. Hence, unforeseen events, if they happen, can be met without affecting your regular business operations.

4. To attract potential investors

Investors and venture capitalists give more preference to business owners with exceptional financial vision. Staying up to date with expenses and knowing how much is needed to meet future expenses will get you better scoring.

Financial models and projections will be easy for financial institutions to understand your requirements thoroughly.

How to forecast accounts payable for business?

Your balance sheet is enough for forecasting accounts payable and finding upcoming liabilities. But there is also an established formula that you can use to find the days payable outstanding with the help of past spending data.

This measure will highlight how much time you take, on average, to make vendor payments. The output is measured in days, and you can calculate DOP for any time period.

• DOP = Accounts payable balance * the number of days/overall cost

• Accounts payable balance - the amount that your company owes as a liability to its suppliers during the time taken for measurement.

• The number of days - can be a month, quarter, or annual

• Overall cost - overhead costs required to manufacture the product, including transportation and material costs.

By modifying the figures, you can measure this for any given period and make monthly or annual DOP calculations. And that’s how you accurately make accounts payable projections with the help of past spending data.

The resultant score will provide you with insights into achieving better cash flow ad payment repayment terms. A low DPO score denotes that the company is not making use of credit payment terms fully.

A medium or high DPO is considered ideal and more beneficial as they can use the time to make short-term investments. This is one of the powerful accounts payable forecasting methods that is used commonly.

How to improve accounts payable by forecasting them?

What are the steps involved in making accurate accounts payable forecasting? And how to conduct that? Follow the steps discussed below.

1. Analyze historical data

Accounts payable data of previous months is a goldmine and the best place to start. Your past spending can tell a lot about your payment habits, spending range, and other financial insights.

You can spot variances, highs, and lows and predict which season/term causes that. If the reason is not obvious, dive more into it and find out. Pore over the balance sheet to understand every operating cost involved.

2. Identify certain categories of payments

Every expense belongs to a category. Some common categories are raw materials purchase, payroll, and marketing. If you use automated accounts payable software, it will categorize the expenses on its own and present them to you.

Without that, you will have to do categorization manually. Now check the spending range for each category over different periods of time.

3. Determine instances of late payments

It’s easy to spot the payments that are made late as you also have the DPO value. You can also find it by seeing if there are any late penalty fees made.

Go through the balance sheet and find out the instances where payments are made late. Is that because of the payment method?

Is it a specific vendor? Did the delay happen just once or repetitive? Was it specific to a season/phase of the year? Come up with answers to the above questions.

4. Identify the payments made on time

Now do the opposite and discover the payments that are made on or before the due date. What are the goods/services that are related to these early payments?

How early they were made and whether any early payment offer is applied? Derive answers for the above.

5. Check payment patterns of debt repayments

If you obtained bank loans, check your repayment history over the tenure. How long did it take to repay the monthly due, how did you spread the due over the entire tenure, and whether any late payments were made? 

6. Calculate the taxes

Now, this can be easy as you will have access to the local tax payment portal. Estimate the total tax paid by your company and when they are made. (whether they are made close to the deadlines or earlier than that).

Leverage automation to streamline your accounts payable forecasting

We know that the starting and end point of accounts payable projection is your accounts payable data and process. Having access to automated accounts payable applications can reduce your burden and hand data for all to see.

That’s where Volopay can help you. Volopay is an accounting and payment software that helps in making automated payments. It has a lot to offer from simplifying accounts payable and expediting payments which is one of your goals. 

You can schedule payments earlier and monitor them in real time from the same dashboard. It gives you entire access to your past spending and shows actionable insights too.

Volopay modernizes the way your accounts payable are handled. It makes it easy to achieve what has been forecasted during the accounts payable projections.


How do you use DPO to forecast accounts payable?

DPO is an indicator of how long you take to clear vendor bills and make payments. By estimating this, you can streamline your outgoing payments in a way that leaves you with better cash flow. 

How do you forecast accounts receivable?

There are many accounts payable forecasting methods. Go through the balance sheet and look into the historic data, identify payment categories, patterns, repayment time taken, payment methods used, and other factors to do accounts payable forecasting.

Can accounts payable forecasting be done manually?

Forecasting accounts payable manually is possible. However, it will be complicated and cumbersome to handle huge amounts of data. That can prolong the time it takes or lead to inaccurate forecasts.

Gain access to real-time data and do your AP forecasting right!