Copyright anbirts1 CASH FLOW FORECASTING. copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods.
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copyright anbirts 1
CASH FLOW FORECASTING
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AGENDA
• The Dilemma
• The Purpose
• The Problem
• The Methods
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The Dilemma
• We Need It To……?
• But Forecasting Is Essentially…...?
• Therefore What Is The Purpose?
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Purpose
• If We Could Get It Right– Liquidity Management:
Having Funds Available To Meet All Known and Unknown Commitment
– Minimise Cost of Funds
– Maximise Interest Earnings
– Budgeting and Control
– Currency Risk Management
– Working Capital Management
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The Problem
• Degree Of Accuracy
• Time Period– Short
– Medium– Long
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Process
• What steps need to be taken to produce a cash flow forecast?
• Identify inflows and outflows
- split into components, so for payments, wages, suppliers, taxes
- for receipts, trade receipts, interest earned
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Process
• Identify the source of the information - Last years information as a guide - Sales, actual and projected, sales dept - Purchases, actual and projected, purchasing - Accounts payable and receivable data - Capital investment plansSources should be reliable and consistent and
available when needed.
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Process• Apply degrees of certainty
• So accounts receivable data should be adjusted by historic behaviour patterns
• Some flows are certain e.g. tax payments, interest receipts, FX settlement
• Others less so e.g. timing of international collections
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Process
• Select the appropriate method for the forecast
- Time period
- Purpose
- How handled e.g. in treasury system or on spreadsheets
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Process
• Review the data, does it make sense?
- Value dating issues
- Omissions of important items or double counting
- Opening balances, precautionary balances
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Process
• How to overcome the challenges?
- Centralised vs decentralised groups- Motivation- Autonomy
Carrot and stick- Name and shame- Publish variances- Allocate costs
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MethodsDistribution Model
• Class Exercise:A Company issues Euro 1,000,000 checks on Thursday August 16th.
What can the company expect to clear over the next week?
Historically, past distributions have followed this pattern:
Business days % Of value
after cheque expected to Day of
issued clear week effect % effect
1 13 Monday - 2
2 38 Tuesday 0
3 28 Wednesday +2
4 13 Thursday +1
5 8 Friday - 1
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Distribution ModelDistribution Forecast Model
Date Business day Day of % expectedClearing
after issue week to clearForecast
Aug 17th 1 Friday 13 - 1= 12 120,000
Aug 20th 2 Monday 38 - 2= 36 360,000
Aug 21st 3 Tuesday 28 = 28 280,000
Aug 22nd 4 Wednesday 13 + 2=15 150,000
Aug 23rd 5 Thursday 8 + 1=9 90,000
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MethodsReceipts And Disbursements
A company, through historical analysis knows that its cash receipts from sales are as follows:
20% Pay cash
50% 30 days later28% 60 days 2% Will be bad debts
SalesJune USD 1,250,000July USD 750,000August USD 1,075,000September USD 2,504,000
What Is The Cash In Flow Forecast for September?
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Receipts And Disbursements
June July August September Never!
1,250,000 250,000 625,000 350,000 - 25,000
750,000 - 150,000 375,000 210,000 15,000
1,075,000 - - 215,000 537,500 21,500
2,504,000 - - - 500,800
1,248,300
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Receipts and Disbursements
• The Company Also Has Payments To Make!
• These Amount To 75% Of Sales Revenue (Generally)
• 25% Of Payments Are Made On Purchase
• 50% Of Payments Are Made Thirty Days After Purchase
• 25% Of Payments Are Made 60 Days After Purchase
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Receipts And Disbursements
Purchase Made June July August September
June 937,500 234,375 468,750 234,375 -
July 562,500 - 140,625 281,250 140,625
August 806,250 - - 201,562 403,125
Sept 1,878,000 - - - 469,500 - 1,013,250
Net Cash Flow For September Revenue 1,248,300 Net + 235,050
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Proforma Statement
Profit & Loss
Sales 3000
Cost of Goods Sold -2250
Selling/ Admin Costs -300
Depreciation -150
Interest Expense -30
Income before Tax 270
Less Tax @ 34% -92
Net Income 178
Balance Sheet
Cash 150
Receivables450
Inventory 300
Net Assets 600
Total Assets 1500
Creditors 75
Equity 900
LT Loans 300 @10%
Preference Shs 225 @12%
Total Liabilities 1500
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Proforma Statement
COGS, Selling & Admin, Creditors and Current Assets are a Constant % of Sales
•Forecast for Next Year–Sales increase by 10%
–Cost of Goods Sold = 75% of Sales
–Selling & Admin. Costs 10% of Sales
–Depreciation = 75
–Interest Expense = 10% on 200 Term Loans + 12% on Preferred Shares
–Dividend of 36 to be paid
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Projected P&L And B/S
Profit & Loss Projected
Sales 3000 3300
Cost of Goods sold -2250 -2475
Selling/Admin Costs -300 -330
Depreciation -150 -75
Interest Expense -30 -20
Income Before Tax 270 400
Less Tax @ 34% -92 -136
Net Income 178 264
Pref Div 27 -27
Dividends -36
Retained Earnings 151 201
Net Surplus 108.5
Balance Sheet Projected
Cash 150 165 5% of sales
Receivables 450 495 15% of sales
Inventory 300 330 10% of sales
Net Assets 600 525 600-75 Depr
Total Assets 1500 1515
Creditors 75 82.5 2.5% of Sales
Equity 900 1101 900+201
LT Loans 300 200 @ 10%
Preference 225 225 @ 12%
Shs
Total Liabilities 1500 1608.5
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Statistical Methods
•Moving Averages
•Exponential Smoothing
•Regression Analysis
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Moving Averages
Moving Average Forecast
Day Cash Flow Forecast (N=5) Error
1 110
2 120
3 115
4 122
5 126
6 124 118.6 5.4
7 129 121.4 7.6
8 133 123.2 9.8
9 132 126.8 5.2
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Exponential Smoothing• Allows More Weight To either Historical or Recent Observations
• Recognises Forecast Errors and Adjusts For Them
Next Period = Current + Factor (Current - Current)
Forecast Forecast Actual Forecast
OR
Next Period = Current + Factor (Current Error)
Factor= Alpha, the smoothing constant. Ranges from 1.0-0
Value of 1 places most weight on current actual.
Value closer to 0 places weight on previous forecast
p will always be given
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Moving Averages With Exponential Smoothing
Moving Average Forecast Exponential Smoothing Forecast
Day Cash Flow Forecast (N=5) Error Forecast (.4) Error
1 110
2 120
3 115
4 122
5 126
6 124 118.6 5.4 118.6* 5.4
7 129 121.4 7.6 120.76 8.24
8 133 123.2 9.8
9 132 126.8 5.2
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Moving Averages With Exponential Smoothing
Moving Average Forecast Exponential Smoothing Forecast
Day Cash FlowForecast (N=5) Error Forecast (.4) Error
1 110
2 120
3 115
4 122
5 126
6 124 118.6 5.4 118.6* 5.4
7 129 121.4 7.6 120.76 8.24
8 133 123.2 9.8 124.06 8.94
9 132 126.8 5.2 127.64 4.36
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