Presentation on theme: "Copyright anbirts1 CASH FLOW FORECASTING. copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods."— Presentation transcript:
copyright anbirts1 CASH FLOW FORECASTING
copyright anbirts2 AGENDA The Dilemma The Purpose The Problem The Methods
copyright anbirts3 The Dilemma We Need It To……? But Forecasting Is Essentially…...? Therefore What Is The Purpose?
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
copyright anbirts5 The Problem Degree Of Accuracy Time Period –Short –Medium –Long
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
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.
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
copyright anbirts9 Process Select the appropriate method for the forecast -Time period -Purpose -How handled e.g. in treasury system or on spreadsheets
copyright anbirts10 Process Review the data, does it make sense? -Value dating issues -Omissions of important items or double counting -Opening balances, precautionary balances
copyright anbirts11 Process How to overcome the challenges? - Centralised vs decentralised groups -Motivation -Autonomy Carrot and stick -Name and shame -Publish variances -Allocate costs
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 Tuesday 0 328Wednesday+2 413Thursday+1 58Friday- 1
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
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?
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
copyright anbirts17 Receipts And Disbursements Purchase MadeJuneJulyAugustSeptember June 937,500234,375468,750234,375 - July562, ,625281,250140,625 August806, ,562403,125 Sept1,878, , ,013,250 Net Cash Flow For SeptemberRevenue 1,248,300 Net + 235,050
copyright anbirts18 Proforma Statement Profit & Loss Sales3000 Cost of Goods Sold Selling/ Admin Costs -300 Depreciation -150 Interest Expense -30 Income before Tax 270 Less 34% -92 Net Income 178 Balance Sheet Cash150 Receivables450 Inventory300 Net Assets600 Total Assets 1500 Creditors 75 Equity900 LT Preference Total Liabilities 1500
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
copyright anbirts20 Projected P&L And B/S Profit & Loss Projected Sales Cost of Goods sold Selling/Admin Costs Depreciation Interest Expense Income Before Tax Less 34% Net Income Pref Div Dividends -36 Retained Earnings Net Surplus108.5 Balance Sheet Projected Cash % of sales Receivables % of sales Inventory % of sales Net Assets Depr Total Assets Creditors % of Sales Equity LT Loans % Preference % Shs Total Liabilities
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 Value of 1 places most weight on current actual. Value closer to 0 places weight on previous forecast p will always be given
copyright anbirts24 Moving Averages With Exponential Smoothing Moving Average ForecastExponential Smoothing Forecast DayCash FlowForecast (N=5)ErrorForecast (.4) Error *
copyright anbirts25 Moving Averages With Exponential Smoothing Moving Average ForecastExponential Smoothing Forecast DayCash FlowForecast (N=5)ErrorForecast (.4) Error *