Working Capital Management

Working Capital Management (WMC)

Collection Rate Uncertainty

The firm is also faced with collection rate uncertainty. The firm may historically have collected an average of a certain per cent of its outstanding receivables from a particular period in another particular period, but this average contains considerable variability. Further, changing market and economic conditions may make extrapolation of past historic data into future periods a futile exercise.  


There is still another source of uncertainty – production cost uncertainty. The price of materials may change; production problems may arise that lead to increased labor costs; and errors in the sales estimates themselves would necessarily lead to forecasting errors in purchases – hence the volume of payables.  


Capital outflow uncertainty is one of the biggest sources of surprises in cash flow forecasting. This is the uncertainty regarding the timing of cash disbursement related to the firm’s major capital expenditure and constructions programmes. For instance, construction firms are notorious for filing late progress reports and then expecting immediate payment. While only a small per cent of the firm’s total bills are from capital construction programmes, the amounts involved are usually very large. One unexpected item of this sort can impair a carefully drawn cash flow forecast.  


An efficient way to deal with above uncertainties is to apply simulation analysis of the cash forecast. We will now briefly outline this method.


December 18, 2008 - Posted by | Assets, Business Flow, Capital, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, installment loans, Working Capital, Working Capital Management | , , ,

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