Chapter 12 cash forecasting
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Chapter 12 Cash Forecasting. Order Order Sale Cash Placed Received Received Accounts Collection

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Chapter 12 Cash Forecasting

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Chapter 12 cash forecasting

Chapter 12Cash Forecasting

  • Order Order Sale Cash

  • Placed Received Received

  • Accounts Collection

  • < Inventory > < Receivable > < Float >

  • AccountsDisbursement Time ==>

  • < Payable > < Float >

  • Invoice Payment Cash

    • Received Sent Paid


Learning objectives

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


Forecasting monthly cash flows

Forecasting Monthly Cash Flows

  • Importance to top management: “valuable”

    • Typical billing and payment cycle is monthly

    • Monthly interval adequate for anticipating funding requirements (but quarterly may hide intra-quarter imbalances)

  • Monthly cash forecast objectives

    • Accuracy (+/- 5% or +/- 10% on year-ahead forecast)

    • Usefulness (allows timely and appropriate managerial responses to foreseen shortages or surpluses)

  • Forecasting philosophy (see next slide)

  • Forecast parameters (see 2nd following slide)

  • Statistical tools (see Appendixes 12A and 12B)


Forecasting philosophy

Forecasting Philosophy

  • Number and type of forecasts

  • Expenditure on forecasts

  • External versus internal forecasts

  • Quantitative versus judgmental forecasting


Forecast parameters

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


Forecasting daily cash flows

Forecasting Daily Cash Flows

  • Horizon

  • Variable identification

  • Modeling the cash flow sequence

  • Structuring the daily cash forecast

  • Distribution method

  • Model estimation

  • Model validation


The distribution method

The Distribution Method

  • Using the distribution method for disbursements

  • Using the distribution method for collections

  • Example

  • Final comments


Summary

Summary

  • The chapter began with a discussion of the philosophy and environment within which cash forecasts are made

  • The primary 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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