Forecasting Cash Flow Flashcards
CHAPTER 20
Purpose of cash forecasting
Ensure sufficient funds will be available when needed
What does forecast estimates ?
- How much cash is required
- When it is required
- How long
- Will it be available from anticipated source
What to do with cash deficiencies
- Borrowing
- Sell ST investment
- Leading & lagging
Factors affecting cash flow patterns
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
Cash budget
Detailed forecast of expected cash receipts, payments & balances over a budget period
Cash forecast
Forecasts of amount & timing of cash receipts & payments, net cash flow & changes in cash balances
Revised Forecast
Keep forecast relevant & up-to-date
Example :
Revised 3-month forecast every month for the next 3-month period
Rolling forecast
Forecast continually updated
Example :
Adding another month to the forecast when one month ends
How cash budgets are prepared ?
Taking operational budget –> Convert into forecast (when receipt & payment occurs)
Cash flow problems
a) Making losses
b) Inflation
c) Growth
d) Seasonal business
e) One-off items of expenditure
Corrective action : Short-term shortage
Control WCC (working capital cycle)
- ST borrowing
- Sale of ST investment
- Decrease inventory level
- Leading & lagging
Corrective action : Long-term shortage
- 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
General principles & methods in construction of UK General RPI
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)
Time series
Series of figures/values recorded every time
What do you call a graph of time series ?
Historigram
Line/trend graph
Horizontal –> Time
Vertical –> Data value
Trend
Underlying long-term movement over time in the values of data recorded
Seasonal variations
ST fluctuations due to different circumstances which affect results at different time of the year
Cyclical variations
LT fluctuations, take several years to complete the cycle
Trend = Moving average
What is moving average method ?
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
How to plot moving average on graph
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)
Limitations of time series
- 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
Operational budget
Based on how much of the product the business can sell and make
Accrual basis
Orders of budget
Sales budget –> Operational budget –> Cash budget
3 types of budget
1) Target –> based on what u want
2) Optimistic –> based on higher than expected
3) Pessimistic –> based on lower than expected
What is a trend
Smoothed-out time series line.
indicates the general direction of the data line with minimal fluctuations.
Short-term financing
- 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.
Long-term financing
- 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
