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Unit 9: Cash Flows Forecasting and Treasury Management




          With the requirement to present a Statement of Cash Flows,  some companies are finding it  Notes
          fruitful to prepare their cash forecasts with separate  subtotals for  operating, financing, and
          investing cash flows. While the Statement of Cash Flows format might be more appropriate for
          a monthly forecast, it can be used for daily forecasts as well.
          The major differences when it comes to modeling the daily cash flow are a and greater reliance
          on bank-supplied deposit and cleaning data, an emphasis on scheduling  the upcoming cash
          flows via the receipts and disbursements technique, and a lesser reliance on statistical forecasting
          techniques. Scheduling upcoming cash receipts and disbursements requires close contact with
          any corporate personnel having responsibility for or knowledge of impending cash flows. Cash
          managers who have not yet discovered computers have been known to write these flows down
          on their desk calendars!

          One area where  statistics have been instrumental in achieving accuracy is for spreading  out
          (distributing) cheque clearing or receivable cash effects throughout the days of the week and
          month. Here regression analysis has been very useful, in that the day-of-the week and even
          day-of-the month effects can be modeled by assigning each a separate regression coefficient. The
          regression-based distribution method  also has  been used  to model  the cash disbursements
          related to how many business days have elapsed since payroll cheque has been issued.  In
          general, distribution simply refers to spreading out the month’s cash forecast into daily flows,
          thereby showing the intramonth cash flow pattern. We can illustrate this in the disbursements
          context  by assuming that October’s total disbursement is forecast to be  `  40,00,000. We  can
          forecast the disbursements for Friday, October 13, which is the eleventh work day of the month.
                         CD  = (d  + w ) x MDF
                           11    11  5
          where
              CD   = cash disbursement forecast for the eleventh work day of the month
                 11
                d  = coefficient for eleventh work day (from regression model)
                 11
                w = coefficient for fifth day of work, Friday (from regression model)
                  5
              MDF = month’s disbursement forecast (from cash budget)
          If we assume that d  is (.04, w  is .015 and MDF is ` 40,00,000)
                          11      5
          we have:
                         CD  = (.04 + .015) × (` 40,00,000)
                           11
                             = (.055) × (` 40,00,000)
                             = ` 2,20,000
          One can think of the workday coefficient as the effect of the day-of-the-month effect, holding
          constant the  day-of-the-week, and the day-of-week coefficient as to that day’s effect holding
          constant the day-of-the-month.

          9.5 Hedging Cash Balance Uncertainties


          The point is that, without some kind of hedge against the uncertainties of future cash flows, the
          firm incurs costs that could be avoided by the use of a hedging strategy. Of course, there is a
          trade-off between the cost of the hedge and the expected costs that it avoids. It would not be cost-
          effective to hedge against all possible future costs if their probability of occurrence was very
          small. Because  of this trade-off, it  is necessary  to understand  the relative costs  and  other
          characteristics of the various methods commonly used to hedge the uncertainty of the firm’s
          cash flows. Some of the possible hedging methods and their costs are discussed below:




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