1 / 16

Chapter 12 Cash Forecasting

Chapter 12 Cash Forecasting. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection

mercia
Download Presentation

Chapter 12 Cash Forecasting

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 12Cash Forecasting • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • AccountsDisbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

  2. Learning Objectives • Explain importance of short-term cash forecasts. • Indicate why the monthly cash budget is important to top management, and specify the two objectives for its development. • Indicate how daily cash forecasting differs from monthly forecasting. • Explain the receipts and disbursements, pro forma balance sheet, and distribution methods of cash forecasting.

  3. Forecasting Monthly Cash Flows • Importance to top management • Monthly cash forecast objectives • Forecasting philosophy • Forecast parameters • Statistical tools (Appendix A & B)

  4. Importance to top management • Useful planning tool • Typical billing and payment cycle is monthly • Monthly interval is adequate for funding requirements – quarter is too long • Alerts management to threats

  5. Monthly cash forecast objectives • Accuracy • Avert overdrafts, determine credit lines, aid in selection of investment maturities • Usefulness • Too much or too little detail is expensive • Need variance as well as mean

  6. Forecasting Philosophy • Number and type of forecasts • Short, intermediate, long range; daily, monthly, quarterly, annual. • Expenditure on forecasts • Function of CF variability • External versus internal forecasts • Quantitative versus judgmental forecasting

  7. Forecast Parameters • Forecast horizon • Variable identification • Modeling the cash flow sequence • Format of the receipts and disbursement forecast • Interpreting the receipts and disbursement forecast • Developing the receipts and disbursement forecast • Modified accrual method • Pro forma balance sheet method • Model estimation • Model validation

  8. Forecast Parameters • Forecast horizon • How far into the future are we forecasting • Variable identification • Short horizon needs greater detail • Modeling the cash flow sequence • Receipts and Disbursements method • Modified accrual • Pro Forma Balance Sheet

  9. Receipts and Disbursements method • Accuracy declines beyond one month • Format of the receipts and disbursement forecast – see page 421 • Interpreting the receipts and disbursement forecast • Credit lines may be prearranged to cover anticipated shortfalls • Project surplus amounts and durations for investment • May help to establish a target cash balance • Developing the receipts and disbursement forecast • Obtain sales forecast (distribution is better) • Project cash receipts • Project cash disbursements

  10. Modified accrual method • Simplest form: • Strength is ease of implementation and relative accuracy for intermediate forecasts • Weakness is lack of detail to ensure accuracy for short term forecasts

  11. Pro forma balance sheet method • Use percent of sales to forecast • Notes payable may be used as “plug” number • aLess cash and marketable securities • Generally more useful for longer periods than a month

  12. Model estimation • See appendix A and B • Sensitivity • Simulation

  13. Forecasting Daily Cash Flows • Horizon • Variable identification • Modeling the cash flow sequence • Structuring the daily cash forecast • Distribution method • Model estimation • Model validation

  14. Forecasting Daily Cash Flows • Horizon • Historical data may be projected using proper techniques, but a lot of “known” data is included • Variable identification • Rule-of-thumb: the shorter the horizon the greater the detail • Modeling the cash flow sequence • Relies less on statistics and more on known timing of cash flows • Structuring the daily cash forecast • A few (generally) known major flows and many small flows

  15. The Distribution Method • Cash flows are not evenly distributed throughout the week or the month • Disbursement Example: • Where: • CD = Cash Disbursement • MDF = Month’s disbursement forecast • See page 430 and appendix B

  16. Summary • The chapter began with a discussion of the philosophy and environment within which cash forecasts are made. • The value of forecasts is to borrow less or extend investment maturities. • The two major cash forecasting time intervals (monthly and daily) were presented and the processes for variable identification, modeling the cash flow sequence, model estimation, and model validation discussed.

More Related