Presentation is loading. Please wait.

Presentation is loading. Please wait.

Copyright anbirts1 CASH FLOW FORECASTING. copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods.

Similar presentations


Presentation on theme: "Copyright anbirts1 CASH FLOW FORECASTING. copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods."— Presentation transcript:

1 copyright anbirts1 CASH FLOW FORECASTING

2 copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods

3 copyright anbirts3 The Dilemma We Need It To……? But Forecasting Is Essentially…...? Therefore What Is The Purpose?

4 copyright anbirts4 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

5 copyright anbirts5 The Problem Degree Of Accuracy Time Period –Short –Medium –Long

6 copyright anbirts6 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

7 copyright anbirts7 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 plans Sources should be reliable and consistent and available when needed.

8 copyright anbirts8 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

9 copyright anbirts9 Process Select the appropriate method for the forecast -Time period -Purpose -How handled e.g. in treasury system or on spreadsheets

10 copyright anbirts10 Process Review the data, does it make sense? -Value dating issues -Omissions of important items or double counting -Opening balances, precautionary balances

11 copyright anbirts11 Process How to overcome the challenges? - Centralised vs decentralised groups -Motivation -Autonomy Carrot and stick -Name and shame -Publish variances -Allocate costs

12 copyright anbirts12 Methods Distribution 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 chequeexpected toDay of issuedclearweek effect% effect 113Monday- 2 238Tuesday 0 328Wednesday+2 413Thursday+1 58Friday- 1

13 copyright anbirts13 Distribution Model Distribution Forecast Model DateBusiness day Day of% expectedClearing after issueweekto clearForecast Aug 17th 1Friday13 - 1= 12120,000 Aug 20th 2Monday38 - 2= 36360,000 Aug 21st 3Tuesday28 = 28280,000 Aug 22nd 4Wednesday13 + 2=15150,000 Aug 23rd 5Thursday8 + 1=990,000

14 copyright anbirts14 Methods Receipts And Disbursements A company, through historical analysis knows that its cash receipts from sales are as follows: 20% Pay cash 50% 30 days later 28% 60 days 2% Will be bad debts Sales June USD 1,250,000 July USD 750,000 August USD 1,075,000 September USD 2,504,000 What Is The Cash In Flow Forecast for September?

15 copyright anbirts15 Receipts And Disbursements JuneJulyAugustSeptemberNever! 1,250,000250,000625,000350,000 -25,000 750,000 -150,000375,000210,00015,000 1,075,000 - -215,000537,50021,500 2,504,000 - - -500,800 1,248,300

16 copyright anbirts16 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

17 copyright anbirts17 Receipts And Disbursements Purchase MadeJuneJulyAugustSeptember June 937,500234,375468,750234,375 - July562,500 -140,625281,250140,625 August806,250 - -201,562403,125 Sept1,878,000 - - -469,500 - 1,013,250 Net Cash Flow For SeptemberRevenue 1,248,300 Net + 235,050

18 copyright anbirts18 Proforma Statement Profit & Loss Sales3000 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 Cash150 Receivables450 Inventory300 Net Assets600 Total Assets 1500 Creditors 75 Equity900 LT Loans300 @10% Preference Shs225 @12% Total Liabilities 1500

19 copyright anbirts19 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

20 copyright anbirts20 Projected P&L And B/S Profit & Loss Projected Sales30003300 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 Earnings151 201 Net Surplus108.5 Balance Sheet Projected Cash 150165 5% of sales Receivables 450495 15% of sales Inventory 300330 10% of sales Net Assets 600525 600-75 Depr Total Assets 15001515 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 15001608.5

21 copyright anbirts21 Statistical Methods Moving Averages Exponential Smoothing Regression Analysis

22 copyright anbirts22 Moving Averages Moving Average Forecast DayCash FlowForecast (N=5)Error 1110 2120 3115 4122 5126 6124118.65.4 7129121.47.6 8133123.29.8 9132126.85.2

23 copyright anbirts23 Exponential Smoothing Allows More Weight To either Historical or Recent Observations Recognises Forecast Errors and Adjusts For Them Next Period = Current + Factor (Current - Current) ForecastForecast 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

24 copyright anbirts24 Moving Averages With Exponential Smoothing Moving Average ForecastExponential Smoothing Forecast DayCash FlowForecast (N=5)ErrorForecast (.4) Error 1110 2120 3115 4122 5126 6124118.65.4118.6* 5.4 7129121.47.6120.76 8.24 8133123.29.8 9132126.85.2

25 copyright anbirts25 Moving Averages With Exponential Smoothing Moving Average ForecastExponential Smoothing Forecast DayCash FlowForecast (N=5)ErrorForecast (.4) Error 1110 2120 3115 4122 5126 6124118.65.4118.6* 5.4 7129121.47.6120.76 8.24 8133123.29.8124.06 8.94 9132126.85.2127.64 4.36


Download ppt "Copyright anbirts1 CASH FLOW FORECASTING. copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods."

Similar presentations


Ads by Google