Advantages Of Cash Forecasting

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Carefully and deftly calculated cash forecast helps a firm to: (i) Select securities with suitable maturities and practical risk, (ii) Avoid over and under-financing and (iii) Capitalize on profits by investing idle money. Short-run cash forecasts serve many forms of purposes. For an example, multi-divisional firms use them as an instrument to organize the flow of funds between their various divisional levels as well as to make financing preparations for these operations. These forecasts may also be useful in shaping the margins or least balances to be preserved with banks. Still other usages of the forecasts are explained below: • Planning bargains of short and long-term debt. • Preparation of payments in piecing together with the capital…show more content…
• The adjusted net income method, on the other hand, is preferred for longer tenure stretching amid few months to a year. Receipts and disbursements method: Cash flows in and out in most of the companies on a continuous source. The main aim of receipts and disbursements forecasts is to conclude that these flows during a prearranged tenure.In the case of those companies where each item of income and expense encompasses flow of cash, this method is preferred to keep a close check over cash. Three broad sources of cash inflows can be identified: (i) operating, (ii) non-operating, and (iii)…show more content…
Evolving a sales forecast is the first step in preparing the cash prediction. All precautions should be taken to forecast sales as precisely as probable. In a case of cash sales, cash is received at the time of sale. On the other hand, cash is recognized after some time if a sale is on credit. The time realizing cash is on credit sales it depends on upon the firm’s credit strategy reflected in the average collection tenure. It can be easily distinguished that the cash receipts from the sales will be exaggerated by changes in the sales book and the firm’s credit policy. To mature a realistic cash budget, these variations should be accounted for. If the ultimatum for the firm’s products loosens, sales will fall and the average collection period is likely to be lengthier which increases the chances of bad debts. In preparing a cash budget, justification should be taken off sales discounts, returns and allowances and bad debts as they reduce the number of cash collections from debtors. Non-operating cash inflows include a sale of timeworn assets and dividend and interest income. The magnitude of these items is mostly small. When within the generated cash flows are insufficient, the firm resorts to external sources. Borrowings and issuance of securities are external financial sources. These establish financial cash

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