FIN4320_Lecture_15_Cash_Forecasting(28p)

FIN4320_Lecture_15_Cash_Forecasting(28p) - Forecasting Cash...

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Unformatted text preview: Forecasting Cash Flows Forecasting Objectives of Cash Forecasting Objectives Liquidity Management s Financial Control s Strategic Objectives s Capital Budgeting s Cost Management Cost s Currency Exposure s Cash Forecasting Horizons and Intervals Intervals Short-Term s Medium-Term s Long-Term s Cash Flow Components Cash Cash Inflows s Cash Outflows s Timing s Degree of Certainty Degree Certain Cash Flows s Predictable Cash Flows s Less Predictable Cash Flows s Data Identification Data Sources s Identification s Relationships s Account Structure s Reporting Requirements s Data Selection s Forecasting Methods Forecasting Spot Method s Technological Relationships s – Yt = a1X1 s Compound Growth – Yt = (1 + g)Yt-1 s Accounting Identity – Equity = Assets - Liabilities Forecasting Methods Forecasting Policy Relationships s Multiple Dependencies s – – – Receipts and Disbursements Distribution Method Pro-Forma Balance Sheet and Income Pro-Forma Statements Statements – Adjusted Net Income Receipts and Disbursements Receipts MONTHLY CASH BUDGETING Input Data 1st Month Sales (January) Beginning Cash Balance (January) Monthly Target Cash Balance Discount % Taking Discount % Paying Net Period % Paying Late $80,000 $700,000 $250,000 2.00% 25.00% 55.00% 20.00% Raw Materials/Purchases: % of Sales 2 Months Before Sale Raw Materials % Paid for Current Month % Paid for Previous Month Labor: % of Sales 2 Months Before Sale Labor: % Paid for Current Month % Paid for Previous Month 70.00% 30.00% 40.00% 40.00% 60.00% 30.00% G&A Expenses (Monthly) Lease Payments (Monthly) Misc. Expenses (Monthly) Depreciation Face Value of Debt Coupon Rate Semi Annual Interest Taxes (Quarterly) $35,000 $15,000 $18,000 $16,000 $3,000,000 8.00% $120,000 $75,000 Actual and Projected Sales Data Month November (Actual) December (Actual) January (Projected) February (Projected) March (Projected) April (Projected) May (Projected) Sales $50,000 $61,000 $80,000 $128,000 $160,000 $192,000 $240,000 Month Gross Sales Collections: Month of Sale 1 Month After Sale 2 Months After Sale Total Collections January $80,000 $19,600 $33,550 $10,000 $63,150 February $128,000 $31,360 $44,000 $12,200 $87,560 March $160,000 $39,200 $70,400 $16,000 $125,600 s January’s Collections – 25% * (1 - .02) * $80,000 = $19,600 » From January’s Sales – 55% * $61,100 = $33,550 » From December’s Sales – 20% * 50,000 = $10,000 » From November’s Sales – Total Collections = $63,150 Month Gross Sales Purchases: Labor: January $80,000 $48,000 $64,000 February $128,000 $57,600 $76,800 March $160,000 $72,000 $96,000 s Purchases – 30% * $160,000 = $48,000 » Occurs two months before the sale s Labor – 40% * $160,000 = $64,000 » Occurs two months before the sale Payments: Raw Materials: Paid for Current Month Paid for Previous Month Total Raw Materials Labor: Paid for Current Month Paid for Previous Month Total Labor January $19,200 $23,040 $42,240 $44,800 $15,360 $60,160 February $23,040 $28,800 $51,840 $53,760 $19,200 $72,960 March $28,800 $34,560 $63,360 $67,200 $23,040 $90,240 s Raw Materials Payments – Paid for Current Month » 40% * $48,000 = $19,200 » 60% * $38,400 = $23,040 s $38,400 = 30 % * $128,000 (February’s Sales) Payments: Raw Materials: Paid for Current Month Paid for Previous Month Total Raw Materials Labor: Paid for Current Month Paid for Previous Month Total Labor January $19,200 $23,040 $42,240 $44,800 $15,360 $60,160 February $23,040 $28,800 $51,840 $53,760 $19,200 $72,960 March $28,800 $34,560 $63,360 $67,200 $23,040 $90,240 s Labor Payments – Paid for Current Month » 70% * $64,000 = $44,800 » 30% * $51,200 = $15,360 s $51,200 = 40 % * $128,000 (February’s Sales) G&A Expenses Lease Payments Misc. Expenses Interest Expense Taxes New Equipment Total Payments $35,000 $15,000 $18,000 $75,000 $245,400 $35,000 $15,000 $18,000 $35,000 $15,000 $18,000 $120,000 $192,800 $341,600 Cash At Start With No Borrowing Total Collections Total Payments Cash At End With No Borrowing Target Cash Balance Surplus Cash/Total Loans Outstanding (To Maintain Target Cash Balance) $700,000 $63,150 ($245,400) $517,750 $250,000 $267,750 $517,750 $87,560 ($192,800) $412,510 $250,000 $162,510 $412,510 $125,600 ($341,600) $196,510 $250,000 ($53,490) Pro-Forma Statements Pro-Forma Income Statement (Millions) Revenues (5% increase) Cost of Goods Sold (55 % of Revenue) Gross Margin Selling Expense (5% increase) R&D Expense (5% increase) G&A Expense (2% increase) Depreciation (10% of Fixed Assets) EBIT Interest Expense (10% of LTD) EBT Taxes (34% of EBT) Net Income Total Dividends (20% of NI) Current Year Previous Year $315.0 $300.0 $173.3 $165.0 $141.8 $49.6 $42.0 $17.3 $9.6 $23.3 $9.5 $13.8 $4.1 $9.6 $1.9 $135.0 $47.2 $40.0 $17.0 $9.6 $21.2 $9.5 $11.7 $3.5 $8.2 $1.6 Balance Sheet Current Year Current Assets Cash (1% of Total Assets) Short-Term Investments (Plug Figure) Accounts Receivable (15% of Revenue) Inventory (35% of Revenue) Other Current Assets (4% of Revenue) Total Current Assets Plant, Prop., and Equip. (Given) Other Fixed Assets (Given) Total Assets $3.3 $1.9 $47.3 $110.3 $12.6 $175.3 $95.7 $58.2 $329.2 Previous Year $3.2 $0.0 $45.0 $105.0 $12.0 $165.2 $95.7 $58.2 $319.1 Current Liabilities Accounts Payable (20% of COGS) Short-Term Debt (Plug Figure) Operating Accruals (15% of COGS) Other Current Liabilities (4% Increase ) Total Current Liabilities Long-Term Debt (@ 10%) Total Liabilities Shareholder's Equity Common Stock at Par Paid-In Capital Retained Earnings Total Stockholder's Equity Total Liabilities and Equity $34.7 $0.0 $26.0 $44.5 $105.1 $95.0 $200.1 $10.5 $63.5 $55.0 $129.0 $329.2 $33.0 $2.2 $24.8 $42.8 $102.8 $95.0 $197.8 $10.5 $63.5 $47.3 $121.3 $319.1 Statistical Forecasting Statistical s Time-Series Forecasting – Simple Moving Average – Exponential Smoothing » Next Period Forecast = {[Current Period Actual * α] Next α] + [Current Period Forecast * (1- α) ]} α) s s Forecast Error = Current Period Actual - Current Period Forecast Forecast Forecast α is the smoothing constant (between 0 and 1) is » Regression Analysis » Time Series Analysis Statistical Forecasting Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 5 Day Moving Average Forecast Actual Cash Flow Forecast Error $138,000 $196,000 $131,000 $193,000 $196,000 $171,000 $170,800 $102,000 $177,400 $132,000 $158,600 $141,000 $158,800 $176,000 $148,400 $189,000 $144,400 $142,000 $148,000 $188,000 $156,000 $187,000 $167,200 $132,000 $176,400 Exponential Smoothing Forecast Forecast Error α = 0.6 $200 ($75,400) ($26,600) ($17,800) $27,600 $44,600 ($6,000) $32,000 $19,800 ($44,400) $170,800 $170,920 $129,568 $131,027 $137,011 $160,404 $177,562 $156,225 $175,290 $182,316 $200 ($68,920) $2,432 $9,973 $38,989 $28,596 ($35,562) $31,775 $11,710 ($50,316) Statistical Forecasting Statistical s 5 Day Moving Average (Period 6) – (138,000 + 196, 000 + 131,000 + 193,000 + (138,000 196,000)/5 = $170,800 196,000)/5 » Error = Actual - Forecast » $200 = $171,000 - $170,800 $200 s Exponential Smoothing (Period 7) » Next Period Forecast = {[Current Period Actual * α] Next α] + [Current Period Forecast * (1- α) ]} α) – {[$171,000 * .6] + [$170,800 * (1-.6) = $170,920 $170,920 Forecast Method Selection Forecast Data Availability s Data Costs s Data Relationships s Uncertainty, Validation, and Measuring Error Measuring s Sources of Uncertainty – – – – Sales Collection Rate Production Costs Capital Outflow Forecast Uncertainty Forecast s Types of Validation – In-Sample Validation – Out-of-Sample Validation – Ongoing Validation Questions? Questions? ...
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This note was uploaded on 04/02/2009 for the course FIN FIN 4320 taught by Professor Pro during the Spring '09 term at Southwestern.

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