1. Chapter 12 Cash Forecasting Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Received Sent Paid Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Received Sent Paid

2. Learning Objectives Explain importance of short-term cash forecasts Indicate why the monthly cash budget is important to top management, and specify the two objectives for its development Indicate how daily cash forecasting differs from monthly forecasting Explain the receipts and disbursements, pro forma balance sheet, and distribution methods of cash forecasting

3. Forecasting Monthly Cash Flows Importance to top management: “valuable” –Typical billing and payment cycle is monthly –Monthly interval adequate for anticipating funding requirements (but quarterly may hide intra-quarter imbalances) Monthly cash forecast objectives –Accuracy (+/- 5% or +/- 10% on year-ahead forecast) –Usefulness (allows timely and appropriate managerial responses to foreseen shortages or surpluses) Forecasting philosophy (see next slide) Forecast parameters (see 2 nd following slide) Statistical tools (see Appendixes 12A and 12B)

4. Forecasting Philosophy Number and type of forecasts Expenditure on forecasts External versus internal forecasts Quantitative versus judgmental forecasting

5. Forecast Parameters Forecast horizon Variable identification Modeling the cash flow sequence Format of the receipts and disbursement forecast Interpreting the receipts and disbursement forecast Developing the receipts and disbursement forecast Modified accrual method Pro forma balance sheet method Model estimation Model validation

6. Forecasting Daily Cash Flows Horizon Variable identification Modeling the cash flow sequence Structuring the daily cash forecast Distribution method Model estimation Model validation

7. The Distribution Method Using the distribution method for disbursements Using the distribution method for collections Example Final comments

8. Summary The chapter began with a discussion of the philosophy and environment within which cash forecasts are made The primary value of forecasts is to borrow less or extend investment maturities The two major cash forecasting time intervals (monthly and daily) were presented and the processes for variable identification, modeling the cash flow sequence, model estimation, and model validation discussed