THE ACCRUAL REVERSAL METHOD FOR CASH FLOW FOR.

(Copyright 1998, 2014 Alan M. Cunningham, Cash Forecasting Associates, 188 Shannon Rd. Armidale NSW 2350 Australia All rights reserved. www.cashfore.com)

Some of the system’s formulae and instructions were written 25 years ago. So please report any anomalies to alanc@cashfore.com

I. GENERAL DESCRIPTION: The Accrual Reversal Method (ARM) is a system for converting pro-forma monthly financial statements into a one-year weekly forecast of Treasury Position (cash +/- short-terms). It first produces a monthly ARM forecast that is similar to an Adjusted Net Income (ANI) projection (also called the Pro-forma Balance Sheet method). But instead of projecting working capital changes from the balance sheet, ARM computes most of them using distributions and algorithms. Then, starting with the Accrual Reversal Base developed in the monthly forecast, the ARM weekly model converts it to calendar weeks, adds collections based on simulated weekly sales and subtracts payments using paydate codes.

The most important advantages of ARM are 1) it is drawn directly from the profit & operating plans (so it does not have to be reconciled), 2) it provides weekly forecasted balances for 12 months or more, and 3) it eliminates most of the cumulative error problems of the receipts & disbursements (R&D) method by using the same projected figures twice, first as an accrual reversal, second as a cash effect (Two “wrongs” do make a “right”).

II. PREREQUSITES: A company must have a reasonably accurate profit planning system (at least 2 years, by month), including pro-forma monthly income statements and balance sheets. Also, the company should have an accurate short-term (30-day) Receipts & Disbursements forecast that will be the source of many of the monthly and weekly distributions and algorithms. It is helpful, but not required, to have a 1-year monthly ANI forecast for comparison to the monthly ARM model.

III. COMPONENTS: The Example Company forecasting components and treatments in Workbook XARMtemps2015 show the typical items to be included in an ARM forecast and how they can be set up:

COMPONENTS THAT ARE ASSUMED TO CASHFLOW (or occur) EVENLY THROUGH THE MONTH:

* Net Operating Income (EBIT)* Capital Expenditures payments* Misc. Working Capital changes* Sales* Expensing of Depreciation, Major Payables, Payroll & Retirement, and taxes

COMPONENTS THAT HAVE WEEK-TO-WEEK CASH FLOW DIFFERENCES:

* Collections: up to 3 revenue streams with different collection distributions over prior 13 weeks, plus current week for COD.

* Major Payables:- Advertising & Promotion: Paid on the 15th of following month

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- Purchases #1: Paid on the 20th of following month- Purchases #2: Paid half on 10th & half on 25th of following month

[NOTE: If your company doesn't have some version of ”Net 30" payables like the above, you’re going to need to modify both the monthly & weekly template treatments for these components.]

* Salary Payroll: EOM* Wage Payroll: every other Friday* Retirement Contributions: 15/Mar & 15/Sep* Fed. & State Corp. Income Tax: on the 15th of the month, quarterly* Property Tax: 30/Apr & 31/Dec* Long-term financing proceeds: on the 1st, various* Debt service: 1st, various* Short-term interest income & expense: weekly* Common Dividend: 1st, quarterly* Preferred Dividend: 1st, quarterly* Misc. constant payable: 15th

* Transfers to & from subsidiaries & affiliates: 1st

Although this example list is hypothetical, it is based on our experience in consulting with several different client companies. We can’t stress enough that your list should be just as short and simple. The sin of omission in the Accrual Reversal forecasting system has a relatively painless consequence. Again, these dates are just examples & will be changed in your company’s application.

IV. SYSTEM DESCRIPTION:

The objective of this system is to generate an accurate forecast of treasury position (the net of cash, S-T borrowings & S-T investments) for each Friday afternoon for the next 12 months. The models needed to do this are 1) a 5-year monthly simulation & forecast and 2) three succeeding years' weekly models. We assume and recommend that users will continue forecasting their bank transactions over 1 or 2 days, and their short-term daily treasury positions (approximately 30 days) using R&D. Even though the ARM 1 year forecast, like all forecasts, starts at the present, it’s first several weeks should be largely disregarded. (This is why holidays are comfortably ignored in the ARM.) The exception would be when ARM and R&D forecasts are scarily different, in which case something is wrong with one or the other.

To put dates on an example, at 1/Jul/14 a calendar year company wants to forecast the 53 weeks from Jul/14 through Jun/15. For this desired forecast, the monthly model should simulate the period Jan/11 - May/14 (Jun/14 actual data won't be available yet) and forecast the period Jun/14 - Dec/15. The first weekly model should simulate 2013. The second weekly model should simulate the weeks of 3/Jan/14 - 30/May/14 and forecast 6/Jun/14 – 26/Dec/14. (The various simulations are necessary to make sure that the components, distributions and formulas that comprise the forecast are correct.) The third weekly model should then start with the 26/Dec/14 position and forecast all of 2015.

The following table may make this example clearer:

Dec/10 Dec/11 Dec/12 Dec/13 Dec/14 Dec/15 | | | | | | <-------------------------Simulation--------------------/--------Forecast--------> Monthly Model

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<-----Sim-----><Sim/-Fcst-><-----Fcst------> Weekly Models <----------------> Jul/14 Jun/15 Desired Forecast

NOTE: From here on, you probably will want to have a printed copy of this write-up to reference while displaying the XARMtemps2015 worksheets on screen.

The MONTHLY TEMPLATE (5Yrtemp) is set up with each year's data and calculations starting in the _A column of A, AA, BA, CA & DA. This is so that January is always in Column _C, ... December is always Column _N, and Totals are in _O. A few inputs are required in each year's home screen starting at A1, actual positions are the only inputs on each year's page 1, and lots of data goes into pages 2 & 3

The monthly model 1) computes each month's ARM net cash flow & treasury position, 2) transfers selected input & results data down to the data feed ranges starting at _A181, and 3) transfers positions & differences down to the graph data range beginning at A241. (The graph data range doesn't follow the A, AA, etc. yearly convention because an uninterrupted series of cells is needed for graphing.)

Operation of a WEEKLY TEMPLATE (14temp) begins with inputting a bit of data into the home screen starting at A1 and setting up the collections factors starting at I4. The data fed from the monthly template is then handled in several steps: First, the income, accrual reversal and cash effects (making up the "monthly feed" from the monthly model) and the revenue data are transferred to the weekly driver data range beginning at A81. These are converted to daily figures in the weekly driver that begins at A9. The weekly driver then creates weekly feed and billings figures.

Second, the weekly billing figures are converted into collections in the billings & collections range beginning at Y9. Third, the other fed data are computed &/or assigned to specific weeks in the ranges beginning with Major Payables at AG21 through Dividends & Other at BM21. Finally, all results are combined into the Summary Report range beginning at I21.

V. MONTHLY TEMPLATE INSTRUCTIONS

The main purpose of the monthly model is to set up data for transfer to the weekly templates for the next year or two. Once it is up and running, it can also be used as a verification of or even a substitute for a 5 year adjusted net income (ANI) yearly, quarterly or monthly forecast. But its main purpose is to feed the weekly templates.

It is set up for the 5 years beginning with 2012 so that you can test your data and formulas on a full 3 years of actual data through historical simulations. Many of the components in the model and in the example case are independent, driving variables. This means that while the values of these components are changed from planned to actual as the forecast is updated, you should not change the cash flow values themselves, nor should you change any of the model treasury positions to actual.

To print:

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* Click View, Custom View, select year desired, Show. For all pages, click Print. For Page 1 Summary Report only, click File, Print and select page 1 to 1.

To use for first application:

Open ZARMTemps2014, Save As newname.

* Enter data in the Yr 1 home screen at A1:

Casename: Limit to 8 characters so it fits in the graphs.

YR1 label: leave as 2012

Datadate: identifies which set of accounting reports or plans were used for each year.

PPDs & OWCs: (Prepaids & Other Working Capital) leave at zero.

Beg. Bal.: At this point, use your 31/Dec/11 treasury position as the beginning balance.

Collections %: The collections distribution percents (decimals) are used to compute collections from up to 3 revenue subtotals. If your collections formulas need to go back more than 2 months, you will need to change this section and the formulas starting on Row 94 before going any further.

ST Int. %: enter your short-term interest rates on Investments & Debt as percents. Although in real life you may have some of each, the model uses the Invs % on positive prior month balances and the Debt % on negative balances.

Graphdiff: leave at zero

Start Date: leave at 15-Nov-11

LTF "Word": leave as Actual

Comment: enter whatever you want as a heading for each year's printout.

* Enter data in the Yr 2 - 5 home screens, at BA1 - DA1. All will be carried forward except the Datadate, OWC values and the LTF "Word" (which is intended to briefly describe L-T financing alternatives, such as "50.0 FMBs"). If you want to override any year’s interest rates, go ahead; just remember that you’ve wiped out the carryforward formula.

* Enter actual Month-End Positions on row 74 starting at C74, AC74, etc. Copy the Diff formula from CB76 out to as many months as you have actual MEPs.

* Enter data on pages 2 & 3 (rows 81..175). See next section for a row-by-row discussion. See next instruction to add components.

* Enter formulas as shown at AM239 & AM240 to graph actual MEPs and Diffs. Copy out to current month.

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* Check graph. If the Differences line makes reading the MEP plot difficult, enter an appropriate + or - figure after GRAPHDIFF at B15 and fix the DIFF label at C15

To add components:

* Insert row at second or last row of chosen input block. Label row in Col. A. Copy =SUMs from somewhere else in Col. O. & Col. AO to new row. Copy label formula from somewhere else in Col. P. to new row and to Col. AA. and Col. AP. of new row. Then copy AA__:AP__ to BA__, CA__ & DA__. You’ll want to add each component to the data feed ranges starting at _A181, or _D, _E, _F or _G219, and if they are Accrual Reversal components add them to the monthly feed formulas on Row 79. (NOTE: Adding rows will change some of the cell references in these instructions.)

To update &/or revise:

* Open prior forecast; Save As new name.

* Enter new casename and data where necessary or desired.

* If new actual MEP figures are available, enter on row 74 and copy the diff formula on row 76, too. Then go to where you left off on graph data rows 244 & 246 and copy formulas to the additional months of actual. (Be careful with Januaries: you'll need to change these formulas to reference the next year.)

To change years:

* Change Year 1 label from 2012 to whatever at D3. Change Startdate at A18. Remember that the first weekly model (now 2014) gets its data from the third year of the monthly model, so change it (& and the later 2 weekly models) accordingly.

To change to fiscal years:

* Fix Year 0 & 1 month labels at top of page 2 (starting at A82). These will spread to the whole worksheet. (NOTE: While it is quite easy to change the monthly model to fiscal years, changing the weekly models is much more difficult and won't be explained in these instructions.)

To add years:

* Copy DA1:DP237 to EA1, etc. Also extend the graph range now ending at BJ242-248 for added years.

To correct actual beginning treasury position (12/11 in this template):

* Oxymoronic as this may sound, when your AAT position is riding consistently above or below actual, change the beginning actual figure; it was "wrong" (that is, it contained a random variation that has carried forward).

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VI. MONTHLY MODEL PAGES -- Detailed Explanation and Discussion

This section is an explanation and discussion of each row of the 5YrTemp accrual reversal monthly template pages with the XXCo example data. Row labels are somewhat cryptic so that they, 12 months and a total fit across one page.

General Notes:

Input convention: When a row label is ALL CAPS, data should be inputted. This is belt & suspender'd by the colored display of the input ranges.

Rounding: To avoid any illusion of extreme accuracy, all dollars are rounded and/or displayed to the nearest $100,000. Don't worry about fixing a .1 - .3 rounding error; your forecast is going to be a lot wronger than that, anyway.

Monthly Feed components: The " ** " means that this row item is included in the Accrual Reversal Base/Monthly Feed at the bottom of page 1.

Beginning Figures: For both the model and actual Month End Positions, and for a few of the components, Year 1 needs beginning figures from the previous month or 2. Beyond Year 1, the model picks up these lead-in figures from each prior year.

Data Sources: The typical data source of all components is shown in parentheses to make inputting easier.

Totals: All Total rows are =SUMs and won't be discussed separately. This allows you to insert additional rows of data before the second or last row which will then be included in the totals. There is some extra space at the bottoms of both page 2 & page 3 so that you can add a few input rows without changing the general report format.

CFA data source: The source for dividends and several other components is labeled "CFA" for a Cash Flow Analysis. This is intended to include similar sources such as an ANI forecast, sources & uses of funds (S&U) and SFAS 95 cash flow statement. One of these is often included in the reports package from your planning dept., but sometimes not.

Page 1:

Headings: Except for the Run Date from the computer clock, all the headings items are simply pulled down from the Home Screen. It's useful to have these items on each report 1) to help keep track of the assumptions for each run and 2) to make the model easier to explain to others.

NOI (Ebit) ** [Row 30]: Net Operating Income from page 2. Flagged as "Ebit" as a reminder that Interest and Tax expenses are still "in" the income figure, so they don't have to be added back. If you want to start with EBITDA, enter it in Row 84 and set D&A to zero.

+ Depr. & ONC ** [Row 32]: Just as in a typical ANI forecast, Depreciation and Other Non-Cash expenses are added-back first. From Tot Depr & ONC, page 2.

- CE Pymts (M-1) ** [Row 33]: From CE'S BOOKED, page 3, offset one month. Capital

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expenditures are paired with Depr. & ONC because depreciation is the non-cash expensing of prior years' capital spending. These will usually NOT be the same as the capital expenditures payments figures on an ANI forecast, S&U, cash flow analysis, SFAS 95 statement of cash flows or R&D forecast. The differences will be either 1) insignificant or 2) attributable to the capitalized portions of payroll & inventory withdrawals for companies that build or develop their own long-term assets. See PAYROLL AR (est.), below.

- Dividends [Row 35]: From Total Dividends, page 2.

- Income Tax Pymts [Row 37]: From Tot Inc Tax Pd, page 3.

+ LT Fcg Proceeds [Row 39]: From LT Fcg Proceeds, page 3.

- Debt Service [Row 40]: From Tot Debt Svc, page 2.

+/- Extraord. CFs [Row 42]: From Tot. Extraords, page 3.

+/- Subs & Affil. [Row 43]: From Total Subs & Aff, page 3.

+/- Myst & Expermt [Row 45]: From Total Mysts & Exps, page 3. Mysteries are unexplained cash flows that emerge from the historical simulations. They should be shown right out front so that they don't get buried in an Other (read "fudge") category. Experiments are some trial shots at some future "what if's" that shouldn't yet be mixed in with the firmer plan data.

- Tot Revenues ** [Row 47]: From Total Revs, page 2. These are reversed and collections added to compute the accounts receivable change cash flow component that is taken from the balance sheet in an ANI forecast.

+ Collections [Row 48]: From Tot Colls, page 2. Because this is the largest single component of most companies' cash forecasts, collections are handled on a much more detailed basis in the weekly models.

+ Adv & Prom Exp** [Row 50]: From Tot Ad & Pr, page 2.

- A&P Pymts (M-1) [Row 51]: These are offset one month from the prior month's advertising and promotion expenses. Like capital expenditures, these may not match the payments in a R&D forecast due to a significant payroll content of A&P expenses.

+ Purchases ** [Row 53]: From Tot Purch's, page 2.

- Purch Pymts(M-1) [Row 54]: Purchases offset one month. This Purchases/Purch Pymts treatment is only for the purpose of computing a large part of the accounts payable change cash flow. The cash flow effect of purchases on inventories is handled in the inventory change sub-component of Other Working Capital Change, below.

+ P/R Accrued ** [Row 56]: From PAYROLL AR, page 3.

- Payroll Paid [Row 57]: From PAYROLL CF, page 3. This payroll treatment is usually not a significant factor in the monthly model because the timing and amount of the accrual reversal and cash effects are about the same. But because it is almost always a necessary component of the weekly models, we might as well set it up and use it here, too.

+ Retirement Exp** [Row 59]: From RET. EXP, page 3.

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- Rtmt Contribs [Row 60]: From RET. CONTR, page 3.

+ Othr Reversals ** [Row 62]: Since there is only one Other component in the example, this is pulled directly from that item, PROP TAX EXP, page 2.

- Other Cashflows [Row 63]: From PROPTAX PYMTS, page 3. When there are multiple other accrual reversals and cashflows, these formulas will need to be extended to pull them all in. But be careful not to add too many components.

+/- Other W/C Chg ** [Row 65]: From OWC Total, page 3.

+/- S-T Interest [Row 67]: Computed at 1/12 the interest rate on the prior month's Model MEP. Like collections, this is handled by a more detailed, weekly computation in the weekly models; so there will be differences between these monthly figures and their weekly counterparts. Unlike collections, however, this different treatment in not so much for forecasting accuracy as it is to provide an easy way to handle the iteratively nagging question from the planning/budgeting people: "What's your new short-term interest income or expense forecast?”

= ARM NetCashFlow [Row 69]: The total of all the above components.

Model MEP [Row 72]: Last month's Model Month End Position, +/- this month's ARM NetCashFlow.

ACTUAL MEP [Row 74]: This is each month's Treasury Position is the only input on page 1. Notice that the 12/11 example Model MEP is a little different from Actual. A beginning balance difference not only is typical but also is often quite large. This is because of random variations contained in any day's balance figure, including year-end.

Diff [Row 76]: Model less Actual MEP.

** Monthly Feed [Row 79]: The total of the above **'d items. This is the most important single row item in the monthly model since it is the transfer vehicle for 10 income, accrual reversal and cash flow items to the weekly models. Notice that capital expenditure payments are included in the monthly feed. This is because there is often no regular day- or week-of-the-month pattern to these payments. So the assumption is that they occur evenly throughout the month. If there is a payment pattern, then they should be a) excluded from the monthly feed and b) handled separately in the weekly models as are other payables items (like advertising & promotion payments). The other working capital change is also assumed to occur evenly throughout the month and is therefore included in the monthly feed.

Page 2:

NET OP INC (IS) [Row 84]: Net Operating Income from the Income Statement. This EBIT figure is the best starting point for an ARM forecast. However, it is sometimes not available in certain industries and companies. For example, in public utilities, federal accounting procedures used to require that income taxes be deducted toward operating income, but not interest. So their starting point was "EATBI", and income tax expense became an accrual reversal component.

REV1,2&3 (IS) [Row 87]: These revenue input rows don’t have room for separate labels

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because we need to go back 2 months and use the A & B columns to do it. If the Income Statement doesn't break sales down into good subtotals, your data source may need to be a revenue report or some such. You may be able to get by with just one total sales figure if the payment/collection terms are pretty consistent throughout. In public utilities, we have found that 2 subtotals (residential & nonresidential) are what we need. At a large wholesaler/distributor with over 20 different terms of sale, we were able to consolidate them into 3 subtotals that worked quite well. In any event, keep the real objective of an accurate weekly model in mind when you are setting up monthly revenues and collections.

Collections [Row 94]: For each revenue component, the current, prior & prior-prior months (M, M-1 & M-2) are multiplied by the collection factors inputted in the control screen.

DEPR EXP (IS) [Row 101]: Depreciation is almost always a constant and available from the income statement. This is one input item that rarely changes, even in future months of the profit plan pro-formas.

AMORT & ONC (IS) [Row 102]: Amortization and Other Non-Cash Charges are generally like depreciation. Sometimes you may need to add some row items for various Deferred Charges that do change from month to month.

PROP TAX EXP (TR) [Row 106] and PROPTAX PYMTS(CFA): For companies with significant plant and equipment, property tax expense is usually worth handling as an accrual reversal / cash effect pair. The actual expense figures often need to be dug out of a separate Tax Report (TR), or some such. However, like payroll (see below), almost-as-good results can be had by simply reversing 1/12 of an estimated, constant annual figure each month and paying out the same estimated figure in its 1 or 2 lumps when they usually occur. ("Two wrongs DO make a right.") Use these slots for franchise and sales tax, too.

AD EXP (OS) [Row 109]and OTHR PR(OS): Advertising and promotion may have to come from the detail of an Operating Statement (OS). Like payroll, A & P may not add much accuracy to the monthly model but can create payment lumps when we get down to the weekly model. Because A & P is a one-month-offset payment component, we need 12/10 expenses to pay out in 1/11.

PUR #1 [Row 114] (#2...#N): Purchases are often available from an Inventory Report (IR) or payables summary. Sometimes these should be individual large suppliers. Like A&P, we need a lead-in month for each.

COMMON DIV (CFA) [Row 120]: Like depreciation, once dividends are entered they rarely need to be changed.

PREFERRED (CFA) [Row 121]: Preferred dividends come from the same source as common, but are sometimes paid in different weeks, so they need to be transferred separately to the weekly model.

BONDS (CFA) [Row 125] ... OTHER LONG (CFA) Debt Service: Unless debt service payments are always made the same day of the month, you will need to input each different-payment-day issue or subtotal as a separate row.

Page 3:

BONDS (CFA) [Row 133] ... OTHER LONG (CFA) Financing Proceeds: Like debt service,

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you may want separate rows for long-term financing proceeds.

SUBS (CFA) [Row 138] ... AFFILS (CFA): Forecasting subsidiaries and affiliates cash flows can be a frustrating experience. In many companies, however, the net cash flows to and from S&As are not very significant; so data source problems won't hurt the forecast very much.

INVEN (BS) [Row 143]: Inventory balances can be the grand total of Raw, WIP & FG right off the balance sheet. Although theoretically possible, it is not practical to unravel all the accruals and deferrals involved in the accounting chain from purchases through cost of sales or capital expenditures. So the approach on the assets side is straight from the adjusted net income method: An increase in inventory is a use of cash and a decrease is a source. This is computed below as Inventory Cashflow in Other Working Capital.

CE'S BOOKED [Row 146]: As implied in "- CE Pymts (M-1) **", above, there is a huge temptation to use the same capital expenditures cash flow figures as in the ANI forecast, cash flow analysis, Sources and Uses, FASB 95, etc. Probably don't. Instead, get and use a gross change-in-capitalized-assets figure (after dispositions but before depreciation). See Payroll AR below.

MYSTERY #1 [Row 149]: Particularly in the earlier years of the historical simulation, there are often strangenesses which either a) can't be explained or b) nobody will `fess up to. It's OK to just enter these as mysteries, especially when they offset each other over time. But particularly when something illogical works on an ongoing basis, it's important to keep it out front on the mysteries line as your stimulus for further research.

EXPERMT #N [Row 150]: Here's where we can play with "what if's" without distorting our basic other assumptions and data.

EXTRAORD #1 [Row 154] ... EXTRAORD #2: These are the slots for M&As, legal settlements, stock issues & repurchases, etc.

FEDERAL (CFA) [Row 159] & STATE (CFA) Inc Tax Pd: If the Tax people don't revise their payment estimates with each plan actualization or revision, you may want to build in simple versions of their payment formulas which calculate tax payments as a function of EBT.

PAYROLL AR (est.) [Row 164]: This payroll reversal and the following payments are accrual reversal in its purest form. Instead of worrying about exact payroll forecasting, including adjustment for withholding changes and overall trends during the year, just pick a pretty good estimate for annual payroll "expense" and divide by 12. ("Expense" is in quotes for 2 reasons: 1) You will not find a payroll expense category in the financials; instead, our daily bread is buried in things like Corporate Operations, Maintenance, Product Development, etc. 2) Payroll is also included in some other components we have already handled, like Advertising & Promotion and capital expenditures. But because we are adding back all payroll, not just the expensed part, this works out. Honest.)

PAYROLL CF (est.) [Row 165]: If paid only monthly, use the same 1/12 figure as the reversal. This will be a wash in the monthly model, but sets up the reversal transfer to the weekly model in the monthly feed. If paid partly monthly and partly (or all) weekly or biweekly, figure out the minor differences in monthly cash flow and enter here. This exercise rarely makes a significant difference in monthly accuracy, but is almost always needed for a good weekly model.

RET EXP. (Joe) [Row 168] and RET. CONTR (CFA): With pension accounting having

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become bizarre, it's often important to include retirement as a significant reversal. The expense can often be negative (due to fund performance), resulting in both the expense reversal and contributions having negative cash flow effects as adjustments of income. Probably the easiest place to get historical retirement expense is from the footnotes to the annual report. For future years, you may have to take one of the pension people ("Joe") to lunch and get their secret numbers every once in a while. Retirement contributions can be taken from the CFAs.

Prepaids Cashflow [Row 172]: This example other working capital item is inputted in the home screen as a single yearly total and /12 for each month. Other similar items might be customer deposits and other payables.

Inventory Cashflow [Row 173]: This is computed as the negative change in the INVEN (BS) figures inputted above. If inventory is not a significant asset for your company, you can treat it as a yearly total in one of the home screen's OWC slots, or not at all.

Other W/C Change [Row 174]: This is inputted as a monthly, not yearly, figure on the control screen. If you need a minor fudge factor and don't want to confess to a Mystery, use this. It should be 0, or darn close, though.

VII. WEEKLY MODEL INSTRUCTIONS

The purpose of the weekly models is to forecast Friday treasury positions for at least the next 12 months. Usually models for the current and next calendar years are needed for the 12 month forecast, and a prior year is needed for model development and lead-in. Accordingly, this system includes templates for 2014, 2015 & 2016. These instructions are for the 2014 model, but operation of the other years is identical

To install:

* You’ve already loaded the XARMTemps2015 workbook for the monthly model. Click the 14Temp worksheet to see example figures.

To print:

* Click View, Custom View, select wYr3full, Show. For all 5 pages, click Print. For Page 1 Summary Report only, click File, Print and select page 1 to 1.

To use for first application:

* Open ZARMTemps2015, Save As newname, click 13Temp.

* Enter data in the homescreen (starting at A1). The Monthly Payroll is set to be paid out in the EOM week. The Weekly Payroll is set to be paid at twice its amount every other Friday. The Misc. figure is new to the weekly model and is added back to each monthly feed figure & set to be paid out the week of the 15th. Change all these to your company’s situation. The Graphdiff should initially be inputted at F6 in the same amount as the monthly model, and change the graph diff label at G6, too. Finally, input a percent short-term interest rate at F7. (The interest rate can be changed to a different figure for each week; see next section.)

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* Enter data in Collection Factors range starting at I1. M18, N18 & O18 are average collection periods for Rev1, 2 & 3. Compare these, and the weighted average at P18, to what the Receivables people have for averages. The weighted average won't work until you have values in the revenue ranges. If you need to go back more than 13 weeks, you’ll need to perform major surgery here and in all the collection formulas in Columns AC, AD & AE. Try not to.

* Enter ACTUAL Week End Positions beginning at T24. For starters, also enter the ACTUAL figure in S24 as the beginning ARM WEP. If this is a later year, the prior year's ending ARM WEP for the pre-lead-in week will be carried forward.

* Enter any Extraordinary payments or receipts in the right week starting at BR25 under Other INPUT of the DIVIDEND AND OTHER screen.

To change payment week allocations:

* Change the alpha column-row-keydate code on row 24; this becomes very handy as a mnemonic. For example if your Pur #1 are paid the 10th, change the code to "CI4x 10". Drag the formulas to the right cells. See Week-of-the-month assignments, below.

To add or change payment or receipt formulas:

* Enter or change the code on row 24. If this is an added component, it'll need to have been fed to one of the blank columns of the input screens from the monthly model, and included in the monthly feed.

* Enter each formula in the right week. Copying & pasting doesn't work very well. But if you have a complex formula, you may want to initially copy, then go into each and correct the row numbers.

To update &/or revise (assuming you have already revised the monthly):

Open prior forecast; Save As newname.

* Enter new data (should be minimal; most changes are made in the monthly model.)

* If new actual WEP figures are available, enter in column T. Copy down DIFF formulas in Col. U.

To update Weekly Driver:

If you are adding a leap year, change # days from 28 to 29 at C87.

Correct number of days starting at B12 & C12. When there needs to be some days from Last Month, use 7-T. T (This Month) is the first new month’s Friday date.

Fix Feed and Revs 1, 2 & 3 starting at D12, E12, F12 & G12. When you need to

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increment to a new month, copy cells D__ - G__, then paste to the next row.

To correct actual beginning treasury position:

* (See monthly instruction.)

VIII. WEEKLY MODEL PAGES -- Detailed Explanation and Discussion

This section is an explanation and discussion of each column of the 2014 accrual reversal weekly template pages with the XXco example data. Except for a few specific date and amount references, this write-up also explains and describes the '14 and ‘15 templates.

General Notes:

Dates: All date columns are headed by the Year Label from F4, and each Friday is computed from the Startdate in B4.

Week-of-the-month assignments: Several of the payment and other components (from feed screens A, B & C on page 5) are assigned to particular weeks based on the column-row-keydate code at the top of each such column. For example, "CI4x 20" for Pur #1 of Major Payables on page 2 means that the January payment formula will be "=CI41", February "=CI42", etc. These formulas are manually placed in the week containing the 20th. If the keydate falls in a weekend, the pay week becomes the following week, unless the keydate is followed by a "-". (This manual formula assignment could probably be done using command language logic. But a) we haven't figured it out yet, and b) it only has to be done once for each year in setting up the template.)

Total Columns: Each of the component group calculation screens on pages 2 - 5 are =SUM'd in their far right column. These columns won't be discussed separately.

[Column References]: These are to the top cell involved. Column usage in the weekly models is not as cleanly exclusive as was row usage in the monthly model.

Page 1 -- SUMMARY REPORT

Headings: Casename: from A3. Rundate: =NOW. Monthly casename at far right: from input screen B, page 5.

Monthly FEED +WklyRevl [J25]: This first column is the most complicated of the whole model. Let's start by reconciling the –178.1 total [J79] to its sources. The 2015 monthly feed total is -200.0. The addition of the 2.0 monthly Misc. to the weekly model (a weekly accrual reversal, or "Wkly Revl”) is 24.0 per year, which nets to -176.0. Then with a few days of lead-in and lead-out in the weeks of 3/Jan/14 and 2/Jan/15, this increases a bit to the –178.1 total.

Any particular week's figure is the result of the weekly driver located in columns B & C. The weekly driver is a routine to handle those weeks that straddle calendar month-ends. The weekly driver keeps the model's cumulative totals for the year reconciled to the profit plan --- the now-weekly income, accrual & cash effect figures still add up to the same annual totals as

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their monthly sources. This wouldn't be important if the weekly forecast was used only for the short-term horizon of a few weeks. But when the weekly forecast needs to be cumulatively accurate for 1 or 2 years, minor month-to-month errors can dangerously compound.

Each week of the driver is made up of `L' days from Last month and `T' days from This month. For most weeks L & T are 0 & 7, but transitional weeks not surprisingly range from 6 & 1 to 1 & 6. Each monthly feed figure (plus the $2.0 million for Misc.) is divided by calendar days, then allocated to weeks using the weekly driver.

For example, for the week of 4/Jan/13, the computation is as follows:

December portion: -9.0 monthly feed + 2.0 Misc. = -7.0 / 31 = -.226 * 3 days = -.678January portion : -7.3 monthly feed + 2.0 Misc. = -5.3 / 31 = -.171 * 4 days = -.681 -1.358 Printed as: -1.4

These weekly adjusted feed figures are the base to and from which the figures in all other columns are added or subtracted. So once they are setup, everything else is straightforward R&D-style computations.

Collections [K25]: From TotColl, page 2.

Major Payables [L25]: From MP Total, page 2.

Payroll, P/R Taxes, Benefits & Retirement [M25]: From PR Total, page 3.

Taxes [N25]: From TotalTaxs, page 3.

Principal & Int. and Long-term Finance [O25]: From P&I Total, page 4.

Dividends and Other [P25]: From Tot D&O, page 4.

Mysteries & Experiments [Q25]: From Tot M&Es, page 5.

Net Cash Flow [R25]: Total of the prior 8 columns.

ARM Week-End Position [S24]: Each prior WEP +/- Net Cash Flow.

ACTUAL Week-End Position [T24]: Inputted; set at +/- 5.0 in the example.

Diff [U24]: ARM WEP less ACTUAL WEP.

(Monthly casename) Bals [V24]: From input screen C. Placed on the nearest-to-month-end Friday.

Graph Dates [W25]: For the X-axis of the graph. Also displayed here to help with week identification.

Page 2 -- BILLINGS AND COLLECTIONS

Revenue #1 [Z12] (#2 & #3): These are simulated billings figures which are based on the

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monthly revenues transferred from the monthly model in input screen B and allocated to weeks using the weekly driver. The daily part of this computation is in columns D, E & F. When actual weekly billings are available for the relevant preceding 1 to 3 months, these figures should be used to drive collections. But even absent real billings, some intra-monthly billings patterns could be built into these algorithms to improve the collections forecast.

Collections #1 [AC25] (#2 & #3): These figures are the result of multiplying the simulated billings figures by the collection factors inputted starting at J4.

Page 2 -- MAJOR PAYABLES

Purchases #1 [AH25]: These are the monthly figures from screen B allocated to the week of the 20th.

Advertising and Promotion [AI25]: From screen B, allocated to the 15th.

Purchases #2 [AK25]: From screen B. The monthly figures are split between the 10th and the 25th.

Other INPUT [AL25]: Sometimes there are payables which can't be allocated by formula. This is a slot for these, so that they don't have to be put into Other Other, page 4. But make sure their accrual counterpart has been reversed somewhere.

Page 3 -- PAYROLL, PAYROLL TAXES & BENEFITS

Salary [AQ25]: Monthly salary from C6, at month-end.

Wage [AR25]: Weekly payroll from C7, *2, every other Friday.

F&SWT [AS25] and FICA: We have not yet found it necessary to break these out; but here're some columns just in case.

Benefits [AY25]: From Rtmt Contribs, screen C, allocated to the 15th.

Page 3 -- VARIOUS TAX PAYMENTS

Federal and State Income Tax [AY25]: From Inctax, screen A, allocated to the 15th. If these need to be split into separate dates, you will need to go back to the monthly model and separate them prior to data transfer into the weekly model.

Property & Franchise (and Sales?) Taxes [BB25]: From PropTax, screen C, allocated to the 31st. Notice that with a large payment in both the lead-in and lead-out weeks, the year's total won't match that of the monthly model.

Page 4 -- PRINCIPAL AND INTEREST

Long term-financing [BF25]: From screen A, allocated to the 1st.

Debt Service BG25]: From screen A, allocated to the 1st. Like P&F taxes, notice the

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duplicate 4/Jan/13 & 3/Jan/14 payments.

Short-term Interest [BJ25]: This is calculated at 1/52 of the interest rate (inputted in the homescreen or manually overridden in the %%%% column) on each preceding Friday's model position. It is displayed to 3 decimal places to please the budgeting people.

Page 4 -- DIVIDEND AND OTHER

Common Dividends [BN25]: From screen A, allocated to the 1st.

Preferred Dividends [BO25]: From screen A, allocated to the 1st.

Miscellaneous [BP25]: From C8 homescreen input, allocated to the 15th. This is not for a fudge factor; instead you may have a regular monthly payment which, like monthly payroll (if any), a) doesn't need to be used in the monthly model but b) does cause intra-month lumpiness.

Subsidiaries & Affiliates [BQ25]: From screen B, allocated to the 1st.

Other INPUT [BR25]: Extraordinaries need to be manually assigned in this column.

Page 5 -- MYSTERIES AND EXPERIMENTS [BN25]

Mysteries are used primarily for historical simulations during model development to isolate unexplained items. Experiments are, as in the monthly model, trial "what ifs".

Page 5 -- INPUT SCREENS [CC18]

This is where we display one of the two sets of screens A, B & C for each year contained in the system. The other is the data feed ranges in the monthly model to pull down and transpose the needed figures from the monthly horizontal format. These screens are located so that each January figure is on row 21, 41 & 61, February on row 22, 42 & 62, etc. Notice that there are 5 more columns available for data transfer, 1 in screen A and 4 in screen C. This should be plenty.

IX. GRAPHS

Both the weekly and monthly models generate graphs which are useful both in model development and, more importantly, in month-to-month cash management. They are set up to plot the simulated and forecasted treasury positions against actuals. They also plot a differences line within (hopefully) the accuracy & evaluation range limits of +/- 1% of annual revenue.

The weekly model graph also plots in the month end positions from the monthly model. These will only infrequently be visually identical to the weekly positions for 2 reasons. First, month ends are usually not Fridays. Second, the weekly model calculates collections (and interest) using more detailed algorithms than the monthly model; so differences are to be expected.

We can't overemphasize the value of these graphs. During model development, your eye

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will be able to pick out trends and patterns that even sophisticated statistical techniques can't find. And during normal operation of the models the patterns of forecasted treasury positions will allow more creative and profitable management through the upcoming, now-visible peaks and valleys.

Below is a graph for a USA gas & electric public utility showing Actual and ARM model treasury positions, the differences and an accuracy range of +/- 1% of annual revenue:

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