How should accounts receivable (A/R) typically be forecasted?

Forecasting accounts receivable (A/R) using the historical average is an effective method because it relies on past performance to predict future outcomes. This approach takes into account the actual trends and cycles of a company's sales and collections over a specific period. By analyzing historical data, businesses can identify patterns in customer payment behavior, seasonal fluctuations, and the overall creditworthiness of clients.

Utilizing the historical average allows for a more realistic expectation of future A/R balances, which aids in cash flow management and financial planning. It recognizes that while there may be variation from year to year, past performance offers valuable insights into probable future receivables. This method is particularly beneficial in stable markets where sales dynamics do not change drastically from year to year.

In contrast, forecasting A/R inversely to revenue trends would not accurately reflect the relationship between sales and collection periods, while comparing to competitor A/R can lead to misguided conclusions based on external factors specific to the competitors. Exact amounts from previous years may not account for change and growth in a business, leading to unrealistic expectations. Therefore, the historical average provides a balanced and informed standpoint for A/R forecasting.