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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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