Treasury management - Forecasting

Question 1

Why do company do forecasting (budget)?

Answer 1

To find out if they can pay their supplier, pay their employees, if they can afford to launch a new product, buy new equipment…

Question 2

What are things to look at when forecasting

Answer 2

a/p
a/r
sales
h.r.
taxes
law department
r&D
production
capital market

Question 3

What are the 3 sources of treasury flows?

Answer 3

1. Operations: collected accounts receivable, products and expenses.
2. Investments: Interest, dividend, acquisitions and sales
3. Financing: Issues and reimbursement.

Question 4

What are the usage of cash flows

Answer 4

Operation: 
– Suppliers accounts
– Current expenses
Financial: 
– Debt repayment
– Acquisition

Question 5

What is the Treasurer’s goal?

Answer 5

Treasurer’s goals :
• Forecast flow of funds :  Balance sheet
 Other tools
• Forecast the timing of fund flow
• Assess the level of available funds and short-term
debt availability.
• Define the level of rounding, consolidation and
sensitivity of the forecast

Question 6

What are the complexity of forecasting?

Answer 6

 Geographical location of the users
 Currencies
 Systems used
 Knowledge of data
 Frequency of updating
 External factors: interest rates, foreign exchange,
economic conditions

Question 7

What are the 4 steps to treasury budget?

Answer 7

1. sale forecast:  one of the most difficult task. Usually performed by the marketing/sales department
2. Forecast of inflows
3. Forecast of outflows
4. Calculation of cash flow at the end of the month and
   decision to borrow (short cash) or invest (long cash)

Question 8

What are the various levels in treasury forecast

planning?

Answer 8

1. Treasury forecast
   Forecast of resources based on a few years
2. Treasury Budget (cash)
   Refined treasury forecast on a shorter period
3. Daily follow-up

Question 9

What are the role and function of treasury cash budget?

Answer 9

• Anticipate and negotiate short term financing
• Anticipate excesses and overdrafts
• Select the most appropriate financing or investment vehicle
• Ensure the follow up of objectives; measure differences between expectation and actual results
 take action and appropriate corrective measures

Question 10

Give me a summary of treasury Cash Budget?

Answer 10

In summary
The main tool to manage cash flow. Allows to indicate at which point the company will have excesses and shortages of cash and when external financing will be necessary. The liquidity problem is present in most corporations and is a moving target.

Question 11

What are the structure type of treasury forecast?

Answer 11

1. Inflows
2. Outflows
3. Treasury flow (inflow - outflow)
4. If # 3 negative, need financing if # 3 positive can
   invest
5. Borrow or invest
6. Indirect fees
7. Balance of account

Question 12

What are other elements to consider when treasury forecasting?

Answer 12

• Depreciation
• Fiscal implication
• Taxes

Question 13

What are the two categories of data collection?

Answer 13

 Qualitatives
– Based on jugement of individuals
– Data collection individual or in group.
 Quantitatives
– Analysis of historical data: Averages (simple, moving …), Linear Regression simple or multiple

Question 14

What are the types of data collection?

Answer 14

 Intuitive
– Forecast based on knowledge gained through
experience
 Formal
– Based on knowledge of business as well as an analytical examination of historical data
– Generally involves the use of mathematical models
 Implicit
– Derived from information which is implied, understood or
suggested but not specifically expressed
 Explicit
– Forecast derived from information which is clear and concise

Question 15

What are some judgmental approach?

Answer 15

 Individual
– Provided by one person
 Committee
– Forecast developed through a series of meetings
 Delphi
– Information collected and discussed
anonymously

Question 16

What is Extrapolative forecasting (or time

series forecasting)

Answer 16

 It assumes that all variables remain constant
over the short term forecasting horizon.
 Assumes a relationship exists between
current data and historical data

Question 17

What are some techniques for extrapolative forecasting?

Answer 17

Some techniques:
– Trend: simple moving average, weighted moving
average
– Exponential smoothing: with an alpha coefficient
– Decomposition:
 Random component, chance that variation is due to
unexplained forces
 Seasonal component
 Cyclical component, the long run change is associated with the
general pattern of the business/economic cycle

Question 18

What are some of the casual approaches?

Answer 18

 Simple regression
– Y = a + bX
 Input-output models
– Based on the concept that a given level of sales
or services requires a specified level of inputs
 Cross Impact analysis
– Based on the compilation of events which may
have an impact on the future cash flows

Question 19

What are some of the Distribution Approaches

Answer 19

 Based on single variable
– Interval flow t = (proportion) t (period total)
 Based on multiple variables
– Interval flow tw = (proportion)tw (period total)

Question 20

How do you forecast?

Answer 20

 Identify cash drivers in your company
 Apply “how to” techniques for forecasting individual cash flow line items
 Learn statistical techniques for dealing with cash flow
uncertainties; both on-going and one-time events
 Investigate techniques for both predicting the year-end cash balance and reconciling it to the short-term cash forecast
 Explore how to perform and interpret cash forecast
variance analyses