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Chapter 12 Cash Forecasting


Forecasting Methods: Pro Forma Statements. Based on the percentage-of ... Pro Forma Statements (continued) Generate projected balance sheet and income statements. ... – PowerPoint PPT presentation

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Title: Chapter 12 Cash Forecasting

Chapter 12Cash Forecasting
Order Order Sale
Cash Placed Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Objectives of Cash Forecasting
  • Liquidity Management
  • Financial Control
  • Strategic Objectives
  • Capital Budgeting
  • Cost Management
  • Currency Exposure

Steps in the Cash Forecasting Process
  • Step 1
  • Forecast Horizon and Intervals
  • Step 2
  • Variable Identification
  • Step 3
  • Modeling the Cash Flow Sequence
  • Step 4
  • Model Estimation
  • Step 5
  • Model Audit

Short-Term Forecasting Horizon
  • Daily or weekly forecast for a period of up to a
  • Aids in cash concentration transfers, funding
    disbursement accounts, and making short-term
    borrowing and investment decisions.
  • Helps in setting and managing balances used for
    bank compensation.

Medium-Term Forecasting Horizon
  • Also referred to as cash budgets.
  • Forecast for 1 to 12 months.
  • Used to determine the need for short-term credit
    or availability of funds for short-term
  • Can be used as a benchmark of performance by
    comparing actual cash flows to forecast cash

Long-Term Forecasting Horizon
  • Forecast covers any period beyond one year.
  • Are strategic forecasts used in long-term
    financial planning.
  • Used by financial institutions and rating
    agencies for credit analysis and evaluation.

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

Degree of Certainty
  • Certain Flows
  • Predictable Flows
  • Less Predictable Flows

Data Identification
  • Sources
  • Identification
  • Account Structure
  • Reporting Requirements
  • Historical Data

Forecast Method Selection
  • Establishing Data Relationships
  • Selecting a Method
  • Testing Relationships
  • Managing the Costs of Forecast Systems and Data

Forecasting Methods
  • Methods for Short-Term Forecasting
  • Receipts and disbursement forecast
  • Distribution forecast
  • Modified accrual
  • Methods for Medium- and Long-Term Forecasting
  • Pro forma statement
  • Adjusted net income

Statistical Tools
  • Causal methods
  • Regression
  • Time-series methods
  • Moving average
  • Exponential smoothing
  • Time-series regression
  • Model estimation
  • Model audit

Forecasting MethodsReceipt and Disbursement
  • Receipt Schedule
  • Disbursement Schedule
  • Both schedules are prepared on a cash basis.
  • Completed forecast indicates the projected
    deficiency or surplus of funds in relations to a
    companys minimum cash requirement.

Forecasting Methods Distribution Forecast
  • The total estimated cash flow is spread over the
    days in the forecast horizon using proportions
    that are using actual historical patterns.
  • Easy and inexpensive to prepare.
  • Allows the incorporation of seasonality and
  • Large data requirements for proportion estimation.

Forecasting Methods Pro Forma Statements
  • Based on the percentage-of-sales method.
  • Requires a sales forecast.
  • Determine balance sheet and income statement
    items that can be assumed to be a constant
    percentage of sales.
  • Assume other balance sheet and income statement
    items are constant or can be updated based on
    available information.

Pro Forma Statements (continued)
  • Generate projected balance sheet and income
  • If projected assets are greater than projected
    liabilities and equity, there is a projected cash
  • If projected assets are less than projected
    liabilities and equity, there is a projected cash

Statistical Forecasting Time Series Forecasting
  • Simple Moving Average
  • Gives equal weight to past observations
  • Will always lag any trend in actual cash flow.
  • Approach can be useful in identifying cycles and
    patterns of past data but does not take these
    patterns into account in the forecast

Time Series (continued)
  • Exponential Smoothing
  • Allows the cash flow forecast to be adjusted by
    the prior period forecast error.
  • Allows for more weight to be placed on the most
    recent actual cash flows by choosing a smoothing
    constant close to 1.
  • Forecaster must select the smoothing constant.
  • Simplest version of the technique will lag trends
    in the data.

Forecast Validation
  • In-Sample Validation
  • Out-of-Sample Validation
  • Ongoing Validation

  • 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 five steps of forecasting were developed and
    two major time intervals were presented
  • Forecast models were divided in two categories
    causal and time-series
  • We discussed daily forecasting in the context of
    the distribution method