Page 127 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management Tanima Dutta, Lovely Professional University

Notes Unit 8: Cash Planning

CONTENTS
Objectives
Introduction

8.1 Objectives of Cash Planning
8.2 Cash Budget Simulation
8.3 Cash Balance Uncertainties

8.4 Hedging vs Interest Rate
8.5 Future and Options
8.6 Summary
8.7 Keywords
8.8 Review Questions

8.9 Further Readings

Objectives

After studying this unit, you will be able to:

 Know the concept of cash planning
 Discuss the cash budget simulation
 Identify the cash balance uncertainties
 Discuss the hedging vs interest rate
 Describe the future and options

Introduction

Cash flow planning refers to the process of identifying the major expenditures in future (both
short-term and long-term) and making planned investments so that the required amount is
accumulated within the required time frame.
Cash flow planning is the first thing that should be done prior to starting an investment exercise,
because only then will a firm be in a position to know how its finances look like, and what is it
that it can invest without causing a strain on the working capital. It will also enable the firm to
understand if a particular investment matches with its flow requirement.

The cash forecast is an estimation of the flows in and out of the firm’s cash account over a
particular period of time, usually a quarter, month, week, or day. The cash forecast is primarily
intended to produce a very useful piece of information: an estimation of the firm’s borrowing
and lending needs and the uncertainties regarding these needs during various future periods.
Cash forecasting is extremely important to most firms. It enables them to anticipate periods of
surplus cash and periods where financing will be necessary. This anticipation is the reason that
cash forecasts are generated. Anticipation enables the firm to plan much more effectively for
investment and financing, and via this planning, produce superior return.

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