141124 cash management cash forecasting

BA FINC 46 TREASURY MANAGEMENT
By: KLIEF T. AMORES, 2014
2.2. Cash Forecasting

1.Construct a cash forecast and automate the creation of some of the information contained within it;
2.Create a feedback loop for gradually increasing the accuracy of the forecast;
3.Describe several related topics, including the bullwhip effect and the integration of business cycle forecasting into the cash forecast.
Objectives

oIs used to estimate liquidity position of the company for periods ranging from the current day up to one year.
oShort term forecasts (0-3) months are used primarily for managing liquidity.
oOperational forecasts (1-12 months) are used for medium term working capital and financing requirements.
oLong-term forecasts (1-5 years) are used for planning strategic financial goals.
Cash Forecasting

oCombines what is known about expected receipts (e.g. collections form customers, interest, and maturing investments with expected disbursement (e.g. expected check presentments, payroll, taxes, interest payments, and loan repayments).
Cash Budgeting

oA cash forecasting model primarily based on a combination of actual and estimated receivables and payables.
Receipts and Disbursement Model
NOVEMBER
DECEMBER
JANUARY
Cash Receipts
xxx
xxx
xxx
Less: Cash Payments
(xxx)
(xxx)
(xxx)
Net Cash Position
xxx
xxx
xxx
Add: Opening Cash Position
xxx
xxx
xxx
Ending Cash Position
xxx
xxx
xxx
Projected Balance
xxx
xxx
xxx
Fund Surplus (Deficit)
xxx
xxx
xxx

oCan be used when sufficient historical data on cash flow is available.
Distribution Model
Distribution Forecast
Business Day after Check Issued
% of Value Expected to Clear
Day of Week
% Effect
1
35
Monday
-5
2
25
Tuesday
0
3
20
Wednesday
-2
4
20
Thursday
+2
5
10
Friday
+5
Expected Distribution of a Php250,000.00 Payroll on Wednesday December 7.

Distribution Model
Date
Business Day after Issue
Day of Week
% of Expected to Clear
Clearing Forecast
December 8
1
Thursday
35+2 = 37
Php92,5000
December 9
2
Friday
25+5 = 30
75,000
December 12
3
Monday
20-5 = 15
37,500
December 13
4
Tuesday
10+0 = 10
25,000
December 14
5
Wednesday
10 – 2 = 8
20,000

oUsed for long-term forecast. Uses historical data thus, it is possible to extrapolate relationships between certain elements of the profit and loss statement and the balance sheet.
Cash Modelling

Cash Modelling
Pro Forma Financials
(Amount in Thousand of Pesos)
Profit and Loss
Actual
Projected
Balance Sheet
Actual
Projected
Sales
4,000
4,600
Cash
350
403
COGS
-3,000
-3,450
Receivable
500
575
Selling / Admin Costs
-500
-575
Inventory
200
230
Depreciation
-100
-85
Net Assets
650
565
Interest Exp.
-31
-16
Total Assets
1,700
1,773
EBIT
369
474
Payables
650
748
Tax (40%)
-148
-190
Long-Term Debt
350
200
Net Income
221
284
Equity
700
884
Dividends
-100
Total Liabilities
1,700
1,832
Retained Earnings
184
Net Surplus
59

oA more complex statistical technique, usually performed using a computer.
Regression Analysis

Availability of Data. Using information that is readily available makes it possible for the cash manager to produce a timely forecast. Unfortunately, businesses typically do not maintain data in formats that allow easy access for statistical analysis.
Choosing a Forecasting Method

Reliability of Data. In producing the forecast, the cash manager will have to assess the probability of being correct about the timing of cash flows.
Assured Cash Flows. (e.g. tax payments, dividends, debt repayments, and maturing investments)
Reliable Cash Flows. (e.g. collection from credit sales, payroll, vendor payments)
Unreliable cash flows. (e.g. foreign currency collections, outcome of pending lawsuits, and costs of work stoppages.)

Reliability of Data.
Unanticipated Cash Flow. (e.g. cash inflows or outflows resulting from totally unexpected circumstances such as outbreak of war in an area where company is involved, or the opportunity to buy up inventory due to a competitor going out of business)
Time Horizon. The more distant in time the forecast, the less accurate and the less useful it becomes to the cash manager.

Reliability of Data.
Sensitivity. Things change, and the cash manager must be prepared to review, refine, and adjust the forecast frequently in light of internal and external amendments.

Government Securities
Treasury Securities
Agency Securities
State and Local Government Municipal Obligations
Instruments of Short Term Investing

THANK YOU!

141124 cash management cash forecasting

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