Forecasting Cash Flow

Question 1

Purpose of cash forecasting

Answer 1

Ensure sufficient funds will be available when needed

Question 2

What does forecast estimates ?

Answer 2

• How much cash is required
• When it is required
• How long
• Will it be available from anticipated source

Question 3

What to do with cash deficiencies

Answer 3

• Borrowing
• Sell ST investment
• Leading & lagging

Question 4

Factors affecting cash flow patterns

Answer 4

1) Change in general economic environment
2) Competitor launch new product
3) New cost-saving product technology (need to invest to remain competitive)
4) Moves by competitor
5) Change in customer preferences
6) Government action
7) Strikes (mogok kerja)
8) Natural disaster

Question 5

Cash budget

Answer 5

Detailed forecast of expected cash receipts, payments & balances over a budget period

Question 6

Cash forecast

Answer 6

Forecasts of amount & timing of cash receipts & payments, net cash flow & changes in cash balances

Question 7

Revised Forecast

Answer 7

Keep forecast relevant & up-to-date

Example :
Revised 3-month forecast every month for the next 3-month period

Question 8

Rolling forecast

Answer 8

Forecast continually updated

Example :
Adding another month to the forecast when one month ends

Question 9

How cash budgets are prepared ?

Answer 9

Taking operational budget –> Convert into forecast (when receipt & payment occurs)

Question 10

Cash flow problems

Answer 10

a) Making losses
b) Inflation
c) Growth
d) Seasonal business
e) One-off items of expenditure

Question 11

Corrective action : Short-term shortage

Answer 11

Control WCC (working capital cycle)

• ST borrowing
• Sale of ST investment
• Decrease inventory level
• Leading & lagging

Question 12

Corrective action : Long-term shortage

Answer 12

• Postponing capital expenditure
  ( routine, postponable, etc : replacement of motor vehicle, NOT capital expenditure for development & growth)
• Accelerating cash inflow
• Reversing past investment decisions (sell less important asset)
• Negotiate reduction in cash outflow

Question 13

General principles & methods in construction of UK General RPI

Answer 13

a) Base year
b) Weights
c) Items included
d) Data collection
e) Calculation (calculate each price relative –> weighted –> section indices –> group indices –> final month RPI)

Question 14

Time series

Answer 14

Series of figures/values recorded every time

Question 15

What do you call a graph of time series ?

Answer 15

Historigram

Line/trend graph

Horizontal –> Time
Vertical –> Data value

Question 16

Trend

Answer 16

Underlying long-term movement over time in the values of data recorded

Question 17

Seasonal variations

Answer 17

ST fluctuations due to different circumstances which affect results at different time of the year

Question 18

Cyclical variations

Answer 18

LT fluctuations, take several years to complete the cycle

Question 19

Trend = Moving average

What is moving average method ?

Answer 19

Most recent observations are used to compute an average

Continually updated as new information becomes available

–> Remove/smoothing out seasonal/cyclical variation from a time series

Question 20

How to plot moving average on graph

Answer 20

Point should be located at the mid-point of the period

Example :
Moving average January 20X6 plotted at 31 July 20X5 (midpoint of 12 month)

Question 21

Limitations of time series

Answer 21

• If less historic data available, then less reliable is the result
• Further into the future we forecast, less reliable the result
• Assume trend & seasonal variation from past continue into future
• Ignore cyclical & random variation

Question 22

Operational budget

Answer 22

Based on how much of the product the business can sell and make

Accrual basis

Question 23

Orders of budget

Answer 23

Sales budget –> Operational budget –> Cash budget

Question 24

3 types of budget

Answer 24

1) Target –> based on what u want
2) Optimistic –> based on higher than expected
3) Pessimistic –> based on lower than expected

Question 25

What is a trend

Answer 25

Smoothed-out time series line.

indicates the general direction of the data line with minimal fluctuations.

Question 26

Short-term financing

Answer 26

• Contingency funds
• Overdraft facilities
• Short-term loans
• Selling investments
• Postponing capital expenditure
• Reducing the working capital cycles :
  i) leading and lagging
  ii) reducing inventory levels.

Question 27

Long-term financing

Answer 27

• Leasing rather than buying non-current assets
• Selling non-current assets
• Not reinvesting long-term deposits when they mature.
• Long-term loan
• Issuing shares
• Reducing operations (reducing production or service provision to reduce costs)
• Reducing dividend payments to shareholders