How to forecast accounts payable: 3 common methods

Forecasting accounts payable is an important part of any good financial planning strategy. By projecting the transactions that will hit your AP account, you’re able to control expenses, reconcile outstanding balances with vendor reports, and have tighter control over cash. All of that can lead to greater profits. But forecasting accuracy can be difficult to achieve without the right tools. 

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Let’s look at what accounts payable forecasting is, what the benefits are, and what steps are involved. Then we’ll explore how you can streamline the process for your business. 

What is accounts payable forecasting?

Accounts payable forecasting refers to the process of predicting what transactions are going to hit your AP account. In a quality AP forecasting model, you’ll project not only the amount but the timing of the transactions as well.

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By making your projections as detailed as possible, you’ll see the following benefits:

• More accurate predictions of future cash needs: If you estimate what your AP balance will look like next month or next quarter, it won’t be a surprise when those balances come due
• Improved cash flow management: Forecasting AP estimates your cash outflows to vendors and suppliers so you’ll know how much you can spend elsewhere
• Prevention of cash flow crises: An accurate forecast will ensure you can make payments as bills come due, helping you avoid a mad scramble to come up with cash
• Trends in cost increases: Projections can highlight when costs are rising faster than anticipated, letting you tweak your purchasing habits, find a new vendor, or negotiate

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There are several methods for forecasting AP, but three of the most popular are days payable outstanding (DPO), invoice aging analysis, and historical trend analysis. We’ll discuss all three approaches a bit later.

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But first, let’s discuss the difficulties you might encounter when trying to forecast accounts payable.

Why forecasting accounts payable can be difficult

Forecasting accounts payable can enrich your business in a variety of ways, but it does present some challenges:

Inaccurate data can be costly

Inaccuracies are bound to happen. For example, an employee might miscode an invoice, transpose numbers, or approve two identical invoices. If your AP balance isn’t accurate, your forecasts won’t be either. This could prevent you from building adequate cash reserves, which could cost you in late fees that cut into your budget. You can reduce the likelihood of inaccurate entries by automating your AP process.

Errors can compound

If you see the same errors month over month, it could damage your supplier relationships or lower your credit rating. If you see an error—like that an employee approved duplicate invoices — you can correct it on your books and in your forecasting model. Then you can beef up your internal controls to avoid making the same mistake in the future.

Unforeseen expenses can make predictions inaccurate

You can use historical data to predict the future, but unfortunately, most businesses have unforeseen expenses that won’t make their way into the prediction model on their own. You’ll need to consider how to account for those one-off expenses when forecasting AP.

How to forecast accounts payable: 3 common methods

There are many valid ways to forecast AP. You may even consider using multiple methods to ensure you’re looking at your AP balance from all angles. Let’s review three of the most common methods.

1. Days payable outstanding (DPO)

DPO is a financial metric that measures the average number of days it takes your company to pay suppliers after receiving an invoice. Here’s how you would use DPO when forecasting AP:

1. Calculate DPO: Use the DPO formula: DPO = (Average accounts payable / Cost of good sold) * Number of days in the calculation period.
2. Interpret the result: Compare your current DPO to your DPO in prior periods. Look at industry averages to see if you’re on track.
3. Make changes: Is your DPO where it needs to be? If not, adjust your payment process or inquire about different credit terms with vendors.

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Let’s walk through an example. Based on the information in your balance sheet, let’s say your DPOs for each quarter have been:

• Q1: 34.4 days
• Q2: 31.0 days
• Q3: 29.8 days
• Q4: 24.5 days

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All your vendors have net-30 payment terms. As the year progressed, you made more on-time payments. That’s great. But in the 4th quarter, your DPO dropped more than it needed to. Ask yourself why. 

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Was it to take advantage of early payment discounts? If not, it might be smart to extend those payments out a few more days so you can hold onto cash as long as possible. While you want to avoid high DPO, going too low too often may make it difficult to meet all your financial obligations. 

2. Invoice aging analysis

An invoice aging analysis, often referred to as an AP aging report, organizes your unpaid and past-due invoices into buckets based on age. Common buckets used are:

• Current: Bills not yet due
• 1–30 days: Bills 1–30 days overdue
• 31–60 days: Bills 31–60 days overdue
• 61–90 days: Bills 61–90 days overdue
• 90+ days: Bills more than 90 days overdue

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Examine your payment patterns and fluctuations. If you have any amounts in the overdue buckets, you have room for improvement. Let’s look at an example.

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The only overdue item is a small amount for Vendor 2. Why didn’t you pay the invoice on time? Was there a breakdown in your AP workflow? Once you answer those questions, you should also compare this to prior AP aging reports to see if this is a trend. If it is, you may be damaging your relationship with that vendor.

3. Historical trends analyses

When reviewing your AP account activity over many years, your accounting software can detect payment patterns. Historical information that could be useful when forecasting AP includes:

• Vendor spending: Which vendors invoice you the most? This may tell you which vendors to prioritize.
• Late payment fees: How much money in fees have you been assessed for making late payments? This could show whether you have a good invoice management process.
• Error rate: How often are you making errors when inputting invoices? If your error rate is high, you may want to consider AP automation.
• Seasonal trends: What fluctuations do you see from season to season? You can run reports by quarter or by month to see these trends.
• Outliers: Compared to monthly, quarterly, or annual averages, what were some outliers? Were these truly outliers, or can you plan for the next one?
• Vendor lists: How many vendors are you actively using now vs. a year or two ago, and how does this number compare to industry averages?

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The historical patterns you’ll find useful for decision-making will vary, so your software should have a wide range of historical reports to choose from.

What else to consider when forecasting AP

Here are several things you’ll need to consider when forecasting your accounts payable balance—and when choosing your forecasting method:

• Historical data: Historical data is almost always a great place to start because it reveals patterns about your payment cycle and spending habits.
• Current spending patterns: If your business has been changing and growing rapidly, current spending patterns may be the best indicator of future spending patterns.
• Upcoming projects and purchases: Even if you start with historical data, take planned projects or purchases into account and adjust forecasts accordingly.
• Growth projections: You may be able to apply a growth multiplier to your forecasting model to account for future growth.
• Vendor payment terms: Look not only at when your bills are due (net-30, net-45, etc.) but also at whether your vendors offer any early payment discounts.
• Credit and collections policies: Your vendors’ credit and collection framework can change, which may affect your invoice payment process.
• Regulatory changes: Many federal regulations affect AP. Keep an eye on new regulations that could affect your vendor relationships.Taking all the right factors into consideration can help you ensure that your AP forecast will be as accurate as possible. 

How to streamline AP forecasting with automation tools

Accurate AP forecasting can be challenging without the right tools. Manual processes often lead to delays, errors, and inefficiencies, making it difficult to stay on top of cash flow and vendor payments. That’s why automation tools are essential—they simplify workflows, improve accuracy, and provide real-time insights to make forecasting easier and more reliable.

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Here’s how AP automation software can help:

• Leverages OCR technology: Automatically captures and codes invoice details with OCR for precision, time savings and reduced errors
• Offers real-time insights: Access AP aging reports and payment trends to make informed decisions about cash flow and vendor management
• Prevents duplicate payments: Built-in two-way and three-way matching ensures every invoice and payment is accurate.

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With automation tools in place, your business can streamline AP forecasting, reduce errors, and gain the financial clarity needed to make smarter, faster decisions.

Streamline AP forecasting with Ramp

Effective accounts payable forecasting starts with the right tools, and Ramp Bill Pay is designed to deliver.

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Ramp’s intelligent AP software combines real-time insights, customizable workflows, and comprehensive AP aging reports into one seamless platform that integrates with your ERP.

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With these tools at your fingertips, you can simplify forecasting, optimize your AP workflow, and save time by automating manual tasks like invoice processing, coding, and approvals. Ramp doesn’t just make forecasting easier—it helps you uncover cost-saving opportunities while maintaining complete control over your cash flow.

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Handle a month of AP in minutes. Schedule a demo to see how Ramp Bill Pay processes 10x the invoices with the same headcount.