Working Capital Management

Working Capital Management (WMC)

Issues and Approaches to Forecasting

An important question in short-term cash forecasting is what the length of the forest period to be forecast should be. This depends critically on the volume of the firm’s cash inflows and outflows. If the firm is sufficiently large, it will probably pay the firm to forecast on a daily basis. Small firms with lesser amounts to deal with are probably better off using a month or even a quarter as the length of their shortest period.


Most firms, however, to not confirm themselves to a single forecast; instead they use several forecast with periods of various lengths. In this context, the question arises how one forecast related to another. To see how this question arises, assume that a firm is practicing multiple period-length forecasting and is generating forecasts for the next quarter, months within this quarter, and weeks, within these months.


Does the forecast start with quarterly data and break this down into months, then break the months down into weeks, or does the forecast start with weekly data and aggregate this into months and quarters? Starting with data on relatively long periods and breaking it down into smaller periods is called distribution; starting with data on relatively short periods and aggregating into longer periods is called scheduling. Both the methodologies have advantages and disadvantages. Scheduling requires more data manipulation, but distribution required more sophisticated statistical techniques.

The most common approach to short-term cash forecasts is the receipts and disbursement approach. This method minutely traces the movement of cash and is preferred by firms that exercise very close cash control.


September 24, 2008 - Posted by | Assets, Business Flow, Capital, cash loans, Working Capital, Working Capital Management | , , , , ,

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