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Chapter 12 Cash Forecasting

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

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Chapter 12 Cash Forecasting

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  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

  4. Forecasting Philosophy • Number and type of forecasts • Expenditure on forecasts • External versus internal forecasts • Quantitative versus judgmental forecasting

  5. 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

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

  7. The Distribution Method • Using the method for disbursements • Using the method for collections • Example • Final comments

  8. 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.

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