Working Capital Management

Working Capital Management (WMC)

Issues and Approaches to Forecasting -2

We are talking Issues and Approaches to Forecasting from last two posts. There are four techniques for forecasting financial variables. Diret Method, Proportion of another Account, Compounded Growth, Multiple Dependencies. We talk on all of the above four techniques for forecasting financial variables.

 

Since cash forecast deal mostly with the near future, many of the items on the cash forecast are usually estimated by some variation of the post method. The bases of these spot estimated are usually the firm’s other financial plans. Remaining estimates are mostly on a ‘proportion of another account’ basis, the account often being particular period’s sales. The other two methods are employed less frequently.  

 

It is a common experience that forecast of disbursements is much easier than receipts, because the cash manager can rely on internal information and knowledge of payment knowledge of firm’s other plans (or budgets) and can make use of the forecasting techniques described above. However, a major challenge for him comes in estimating the receipts from the collection of the firm’s receivables. In this regard, an useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts.

 

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October 8, 2008 - Posted by | Assets, Business Flow, Capital, cash loans, Current Assets, Working Capital, Working Capital Management | , ,

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