Issues and Approaches to Forecasting -3

We are talking Issues and Approaches to Forecasting. An useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts. We may, however, adopt a better and a more sophisticated approach.

 

In this, all collection rates are estimated simultaneously by regressing past sales figures against past collections. The estimated coefficients of the sales figures in the regression can be interpreted as the collection proportions, and the standard errors of the estimated regression coefficient as the uncertainty inherent in the estimation of these collection proportions.

 

In a situation where the firm is in multiple business lines, the use of overall payment patterns to forecast receipts will be accurate only when the proportions of total sales made in each business lines are constant. This is an unlikely situation, particularly since the different lines usually have different seasonal variations. In such a multiple situation, the most accurate forecasting result is achieved by forecasting receipts for the different units of the firm individually based on their own receipt patterns, then summing these receipts forecasts to obtain total cash receipts for the firm.