cash forecasting 26-08-2012

7/30/2019 Cash Forecasting 26-08-2012

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A cash forecast is a presentation of cashresults based upon assumptions aboutconditions and events expected to exist oroccur during the forecast period.

Accurate forecasting of cash flows ensuresthat a firm has sufficient cash to satisfy its

obligations at any point of time.


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for more than a year for one month to one

year

for one day to one monthMost of the forecasting efforts are concerned

with the preparation of medium termcategory such as three month forecast (coz

close enough to current business position toallow most of the variables to be predictedwith reasonable accuracy.


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Mathematical Model can be used to preparecash flow projections and project short termfinancing requirements for a business.

Computer based model can be constructedusing spreadsheet or can be acquired as aready made package.


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Management is compelled to anticipate theproblems likely to arise in the course ofachieving forecasted targets and thereforeit is well prepared to meet them.

Enables control of income and expenditure Acts as a tool for monitoring and periodic

evaluation of managerial policies anddecisions.

Facilitates optimal allocation of resourcesfor maximization of profit.

Sense of direction to the organization.


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Over estimation of sales forecast, Under estimation of costs and delays likely to

be encountered.

Ignoring past trends or performances bydebtors

Unduly optimistic assumptions about theavailability of bank loans, credit, grants, etc.

Using financial forecasting as a substitute ofbusiness planning.


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Projected receipts and disbursementsapproach

Percent of sales approach

Projected Balance Sheet Statistical Techniques.


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It follows a simple process of constructing atimeline depicting known and estimated cashinflows and outflows (Using Ms-Excel)

Time line may be a week, month or a year

Receipts and disbursements forecastingtechnique offers users the ability to projectcash balances on a daily basis.


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The Percentage of Sales Method is a FinancialForecasting approach which is based on thepremise that most Balance Sheet and IncomeStatement Accounts vary with sales.

In this method, the basic assumption is thatthere is no change in business, its policies etc.

All ratios to sales in future will be similar to theprevious ones. For example if the coast of sales

to sales was 80% in the previous year, the ratiowill remain same in the current year.


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2004 2005Sales 1,000 1,100

COGS 750 900

The average percent is calculated as under:Sales 100

COGS 78.5

(750+900 / 1000+1100) x 100

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Based on the fundamental accounting Principal

A pro forma balance sheet is prepared usingknowledge of past balance sheet items e.g.

inventory, accounts receivables, accountspayable, etc. and future expectations.

All items in the pro forma balance are populatedexcept cash item.

The cash figure is used to bring the equation intobalance (i.e. Assets= Liabilities + ShareholdersFunds)


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Percent of sales method may be applied for allassets except investment and miscellaneous

expenses and losses. For investment and miscellaneous expenses the

information available is to be followed Percent of sales may be employed for all the current

liabilities Reserves and surpluses may be projected by adding

projected reserve and surplus to previous yearsamount

Generally the value of equity and preference capitalis not changed

Loans tec. Also remain same in the Profromabalance sheet

Is assets side exceeds liability side, the balancingitem will be shown as surplus funds required. Ifliabilities side exceed assets, the balancing item willwould be Surplus


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: long term trend, cyclicaleffect, seasonality and random variable

: compute a meanaverage of a defined number of historical dataelements in a time series.

is a forecasting techniquethat allows the analyst to apply a smoothing factorto determine how much importance to place onpast forecast versus actual results, in determiningthe next forecast value. (June data to May, Maydata to April etc.)

are available to helpdefine the relationship between independentvariables and dependent variable i.e. cash. Thesetechniques range from basic linear regressionmodels to multiple regression models.


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Is a financial plan Provide a plan of action or a set of guidelines

Budgets allocate resources to variousactivities and influence the process ofstrategy formulation.

Provide basis for measurement ofperformance.


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1. Forecasting involves estimating futureevents and analyzing their implications onthe budget. Budgeting, involves preparingbudgets and using them as the basis for

control.2. Budget is a financial Plan, but forecasts is

not a financial plan but prediction of futureenvironments.


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To anticipate the obstacles likely to arise inthe course of achieving budgeted targets

Control of income and expenditure

Optimal allocation of resources formaximization of profit.

Sense of direction to organizational activities.


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Based on forecasting Overlooking industry performance norms,

competitors response and avoiding generallyaccepted financial ratios and guidelinesmakes budget useless

Successful cooperation and coordinationamong the different functional managers.


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Prepare Proforma Balance Sheet for 2008from the following information

Sales 60,00,000 80,00,000

Equity Share capital 50,00,000 50,00,000

Fixed assets 60,00,000 72,00,000

Reserves and surplus 10,00,000 12,00,000

Investments 10,00,000 10,00,000

Long term loans 30,00,000 30,00,000

Current Assets 30,00,000 21,00,000

Current Liabilities 10,00,000 11,00,000


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No additions to be made in reserves andsurplus for the next year

Rs.1,00,000 to be invested in securitiesduring the year 2008

Sales for 2008 are expected to beRs.85,00,000


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Sales 60,00,000 80,00,000 100 85,00,00

Fixed assets 60,00,000 72,00,000 Av. Percent of sales94.28%

80,13,000

Investment 10,00,000 10,00,000 As per additionalinformation

11,00,000

CurrentAssets

30,00,000 21,00,000 Percent of sales36.43%

30,96,550

Total assets 1,00,00,000 1,03,00,000 1,22,10,350

Equity ShareCapital

50,00,000 50,00,000 No Change 50,00,000

Reserves andsurplus

10,00,000 12,00,000 No addition 12,00,000

Long term

loans

30,00,000 30,00,000 No Change 30,00,000

CurrentLiabilities

10,00,000 11,00,000 Av. Percentage ofsales 15%

12,75,000

TotalLiabilities

1,00,00,000 1,03,00,000 1,04,75,000


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Fixed Assets = Av. Of fixed assets x 100Av. Of Sales

(60,00,000 +72,00,00 / 60,00,000 +80,00,000) x 100

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=94.28% Current Assets (30,00,000+21,00,0 00/ 60,00,000 +80,00,000)

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cash forecasting 26-08-2012

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