CH14-Cash Flow Forecasting

Question 1

Describe Simple Moving Average

Answer 1

• Statistical method, time series.
• Developed using an Average of Past Values.
• The more data points, the greater chance a random movement will be eliminated through averaging.
• The margin by which a trend will be missed is greater
• Dampens seasonal turning points

Question 2

Analysis of sales (the independent variable) to cash flows (the dependent variable) data for linear regression produces an intercept of -$124,666 and a slope of 0.1823.
What does the intercept mean?

Answer 2

The intercept is the net cash flow when sales equal 0.

I.e. If there were no sales, net cash outflows would be $124,666 that period

Question 3

Analysis of sales (the independent variable) to cash flows (the dependent variable) data for linear regression produces an intercept of -$124,666 and a slope of 0.1823.
What happens when sales drop by $1?

Answer 3

Net cash flow drop by slope of line, $0.1823

Question 4

What does a receipts schedule consist of/include?

Answer 4

• projection of collections from customers (both cash sales and payments on A/R),
• other cash inflows like interest and dividend income,
• nonrecurring cash inflows like cash from asset sale and external financing

Question 5

Which basis is used for a receipts schedule?

Answer 5

Cash basis (not accrual basis)
B/c receipts schedule is forecasting cash, not earnings.

Question 6

What is a prerequisite to using sales to predict net cash flows using regression analysis?

Answer 6

Correlation

Question 7

Exponential Smoothing formula

Answer 7

Next-Period Forecast = (Alpha * Current - Period Actual) + [(1 - Alpha) * Current - Period Forecast]

Question 8

What does Exponential Smoothing forecast do?

Answer 8

Forecasts cash based on most recent actual, most recent forecast, and alpha is used to weight these two values.
The closer alpha is to 1, the more weight on the past actual rather than forecast.

Question 9

Which forecasting horizon is used to establish and mange target balances for bank compensation?

Answer 9

Short-term

Question 10

Which forecasting horizon is used to determine the company’s need for short-term credit or availability of funds for ST investing?

Answer 10

Medium-term

Question 11

Which forecasting horizon is used as a benchmark to compare actual to projected CFs?

Answer 11

Medium-term

Question 12

Which forecasting horizon is used by Rating Agencies and Financial Institutions?

Answer 12

Long-term

Question 13

8 Cash Flow forecasting uses

Answer 13

1. Manage Liquidity
2. Maximize Returns
3. Minimize Interest costs
4. Control Financial Activities
5. Meet strategic objectives
6. Budget capital
7. Manage currency exposure
8. Compliance Reqs

Question 14

3 Issues/Opportunities in CF Forecasting

Answer 14

1. Simplicity
2. Collaboration and Communication
3. Consistency

Question 15

How to calculate Projected Closing Cash Position AKA Daily Cash Forecast AKA Cash Report?

Answer 15

+ Day’s Opening Available Balances
+ Expected Settlements
- Projected Disbursement

Question 16

3 Cash Flow Types

Answer 16

1. Operating
2. Investing
3. Financing

Question 17

4 Degrees of CF Certainty

Answer 17

1. Certain
2. Predictable
3. Less predictable
4. Volatile

Question 18

What are Certain CFs?

Answer 18

interest, principal payments, dividends, royalties, rent, taxes

Question 19

What are Predictable CFs?

Answer 19

CF based on patterns or number of employees.

Cash collections from credit sales, payroll, clearing of vendor checks.

Question 20

What are Less Predictable CFs?

Answer 20

new product sales, unexpected repairs, claims, timing of marketing costs, travel, bonuses

Question 21

What are Volatile CFs?

Answer 21

FX rates, commodity prices, seasonal flux, interest rates

Question 22

Best practices in Cash Forecasting

Answer 22

1. appropriate detail
2. appropriate platform
3. invest appropriate resources
4. Validate forecast
5. Cooperate and Communicate
6. Ensure forecast is usable
7. Disclose assumptions