FIN4260%20Chap_12_13_SLIDES

FIN4260%20Chap_12_13_SLIDES - Cash Forecasting S/T...

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Unformatted text preview: Cash Forecasting S/T Financial Planning Chapters 12 & 13 Agenda 1 Sales A/R Cash Inv Understand the importance of cash forecasting and be able to forecast a firms cash position. Be able to perform short-term financial modeling. Chapter 2 Review 2 In Chapter 2, we said a firm is solvent when its assets exceed its liabilities and liquid when it can pay its bills on time without undue cost. Liquidity includes both flow and stock. If cash from operations (flow) is not sufficient to cover current obligations, the firm needs to draw down other resources (stock). Cash Forecasting Chapter 12 3 Since cash flows are unsynchronized, uncertain, and uneven, estimating the amounts, timing, and volatility of cash inflows and outflows is critical. Short- and intermediate-term cash planning is a vital process for planning, monitoring, and controlling firm cash. Cash Forecasting Chapter 12 4 The objective of Cash Forecasting is to plan ahead for short-term financing needs and opportunities. It allows for the accurately planning for: Cash Flows Cash Forecasting 5 Short-term cash forecasts: Drive short-term investing and borrowing decisions. Selecting investment vehicles and maturities. Determining and arranging loan products (size, terms, and maturities). Drive financial policies, including disbursement policies, credit terms offered, and bank selection. Total Asset Requirement 6 Firms require some level of current assets and fixed assets to operate, which is affected by: Sales growth Seasonality Surprises Essentials of Corporate Finance (Ross) Asset Financing Policies 7 Essentials of Corporate Finance (Ross) Options include Policy F ( flexible ), which calls for maintaining excess cash equivalents which are liquidated, as needed, and later reinvested. Policy R ( restrictive ) calls for borrowing cash shortfalls. Asset Financing Policies 8 Essentials of Corporate Finance (Ross) Or, the firm can plan for both short-term investing and borrowing Simple Cash Flow Model 9 Forecasting Monthly Cash Flows 10 Typically, a monthly cash budget is prepared for the upcoming year, which includes cash receipts and disbursements. It includes all sources and uses of cash, not just cash from operations. During the year: Actual cash is compared to the budget. This can signal issues to take corrective action. e.g.: Instruct retail stores to run a store-wide sale. The forecast is updated. Steps in Cash Forecasting Process 11 The planning process is integrated with overall financial management, and includes: 1. Forecast Horizon and Interval 2. Variable Identification 3. Modeling the Cash Flow Sequence 4. Model Estimation 5. Model Audit Steps in Cash Forecasting Process 12 1. Forecast Horizon and Interval The Forecast Horizon refers to how far ahead the cash balance is projected, and usually includes a short-term and longer-term view....
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FIN4260%20Chap_12_13_SLIDES - Cash Forecasting S/T...

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