Page 162 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 9: Cash Flows Forecasting and Treasury Management

 A cash flow problem arises when a business struggles to pay its debts as they become due. Notes
The more of the working capital is tied up in stock and outstanding invoices, the more
likely it is that the business has a cash flow problem.
 Treasury management is defined as the corporate handling of all financial matters, the
generation of external and internal funds for business, the management of currencies and
cash flows and the complex strategies, policies and procedures of corporate finance.

9.9 Keywords

Cash forecast: 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.
Compounded growth: This method is used when a particular financial variable is expected to
grow at a steady growth rate over time.

Daily cash forecasts: Daily cash forecasts attempt to project cash inflows and outflows on a daily
basis 1 or more days into the future.
Financial forecasting: Financial forecasting is the estimation of the future level of a financial
variable, often a cash flow, asset level, or liability level.
Long-range forecasts: Cash forecasts of one or more years into the future are needed primarily
to assess the viability of the firm’s long-range financing and operating policies.

Medium-range forecasting: We consider medium-range forecasts to be those that cover cash
flows during the next 12 months.

9.10 Review Questions

1. What are the objectives of cash forecasting?
2. Briefly explain the cash forecasting horizons.
3. What are the methods of financial forecasting?
4. Discuss the forecasting of daily cash flows. Also write down the sources of uncertainty in
cash forecasting.
5. Explain the hedging cash balance uncertainties.
6. What is meant by a cash flow problem?

7. Write down the reasons for cash flow problem.
8. What is Treasury? Briefly explain the treasury risk management.
9. It is June 30 and the treasurer of the ABC Toy Company is trying to forecast cash inflows
for the last 6 months of the year. The following credit sales information (in crore of
rupees) is available:

Apr ` 30 May ` 35 Jun ` 30 Actual
Jul 45 Aug 70 Sep 150
Forecast
Oct 200 Nov 125 Dec 45

From prior studies, the treasurer has determined that approximately 85% of the sales for
any month are uncollected at the end of the month of the sale, 60% are still uncollected
1 month after the sale, and 10% are uncollected 2 months after the sale. That last 10%, with
the exception of bad debts, which average 2% of sales, are collected in the third month
after the sale.

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