Showing papers on "Cash flow forecasting published in 1970"

Evaluating Liquidity Under Conditions of Uncertainty in Mutual Savings Banks

Abstract: Current conditions in the money and credit markets, along with the memory of the “crunch” of late 1966, have caused both the managers of financial institutions and their regulators to reconsider their concepts of “liquidity.” Both Minsky and Ritter have argued forcefully that traditional attention paid to balance sheet proportions should be abandoned in favor of an intertemporal analysis of cash flows [6], [7], and [8]. Ritter states that: “With a multidimensional cash flow forecast extending several years into the future, probability estimates can be made regarding potential liquidity needs over time” [8]. The purpose of this paper is to suggest a forecasting method which explicitly deals with the problem of uncertainty. The method is specifically designed for a mutual savings bank, but it could easily be adapted for a savings and loan association and, with perhaps greater effort, a commercial bank.2 In Section I, components of cash inflows and outflows are examined with the general objective of classification according to: (1) degree of uncertainty and (2) degree of management control. A risk analysis simulation model which permits explicit consideration of uncertainty is presented in Section II. Problems of implementing the model are discussed in Section III, while the implications of the analysis for future research are considered in Section IV.

Cash Position Forecasts Pre and Post the 2008 Market Crash

Abstract: Our study focuses on the important issue of cash forecasting. The Wall Street Journal (WSJ) published articles (1995, 2009) dealing with the record levels of cash held by large publicly traded companies, asserting that cash positions may be excessive. The articles discuss, at points in time, a trend over three decades of increasing cash holdings which doubled from 1980 through 2006. The ability to forecast cash holdings is an important element in deciding where to invest consistent with one's predilection, and may therefore become more important as cash holdings increase. In contrast to prior research, our study demonstrates a forecasting model with firm-specific variables. The results indicate a strong model in spite of changing economic conditions; however, with significant turbulence (i.e. the 2008 market failure), we find that certain coefficients are impacted. DATA AVAILABILITY Data used in this study are available from public sources identified in the study. INTRODUCTION While it is generally agreed that there is not a "right answer" as to how much cash a firm should carry (Opler et al., 1999), it is also generally agreed that practitioners find both the amount of cash a firm is carrying and the ability to accurately forecast cash holdings information that matters. Basic financial theory holds that sitting on cash has a significant opportunity cost that may indicate either a lack of opportunity in an industry or the inability of management to find productive investment choices (Grinblatt and Titman, 2001). However, there is some fairly strong empirical evidence that, as a general rule, a firm's investment behavior is a function of cash availability (Fazzari, Hubbard, and Petersen, 1988). An obvious corollary is that a firm with large amounts of cash that does not invest sees no opportunity and consequently growth cannot be reasonably anticipated by an investor. Basic agency theory would also suggest that management in firms sitting on large amounts of cash are far less incentivized to turn in optimal performance, and that large amounts of debt, that must be serviced, does tend to generate the best performance from management. It is also arguable that the financial crisis of 2008 produced an intercept shift in the corporate world's faith in financial markets and thus attitudes changed towards holding large amounts of cash. Irrespective of which of the above views is correct, in light of the financial crisis and the demonstrated importance of cash flow concerns to investors, the issue is worth revisiting. In addition, prior research (Bates et al., 2009) demonstrates that firm value is positively associated with firm cash positions. In summary, the ability to accurately forecast cash impacts both investors and management. Analyst and other information services (e.g. Value Line) provide cash flow forecasts for large and medium sized firms which are used in the valuation process. Anecdotal information indicates firm cash positions have been increasing which may complicate an assessment of the appropriate holding of cash. Our Figure 1 illustrates an increasing trend in the ratio of cash holdings to total assets. From 1980, the ratio of cash to total assets has increased dramatically before trending back down in the mid-2000s (the ratio was 12.59 percent in 1980 and averaged 18.58 percent in the period 2000 to 2006). [FIGURE 1 OMITTED] Certainly, if companies are hoarding cash, the economic uncertainty of the last decade may have a further adverse effect on forecasting. In their study, Kim et al. (1998) offer two possible explanations as justification for increased holdings of liquid assets. They contend that when companies are faced with volatile earnings reports and/or relatively lower returns on assets the ratio of cash holdings increases. The decade of the 2000s was a period of economic turmoil which may contribute to the increase in cash ratios. …

A Simulation Analysis of Causal Relationships within the Cash Flow Process

Abstract: Based upon the ubiquitous nature of cash flow projections in the decision-making process, it would be desirable to be able to find answers to questions of the following form: (1) How does the level of variability in demand affect the cash outflows for payment of accounts payable liabilities? (2) Does the method used in planning production influence the firm's cash flow patterns? Analysis of existing attempts to model the cause and effect relationships within the cash flow process reveals that the ability to answer questions similar to the ones posed above does not exist. The research accomplished to date can be characterized as being definitional and hypothetical; cash flows have been defined, lists of factors that may influence cash flow patterns have been postulated, and simple examples of what may happen to cash flow patterns have been constructed. Although these preliminary steps are necessary, they are not sufficient for a thorough understanding of the cash flow process. Analysis must be undertaken to establish the cash flow consequences of various combinations of environmental and organizational factors.

A Quantitative Measure of the Risk Factor in Investment Decisions

Abstract: Investment theory has traditionally divided risk into two parts: (1) the risk of business failure and (2) the uncertainty associated with cash flow prediction. Analysis then proceeds to disregard attrition as a variable and to focus on cash flow forecasting. Though high attrition may be typical in the pattern of industry growth, it is certainly an attribute of structural development that has not been investigated extensively. This article explores the character of attrition and develops an analytical device that may be used to adjust separately estimated cash flows for the risk of failure.

Probability analysis of the cash outflow for mortality

Abstract: Cash management in a life insurance finn requires knowledge of the probability distribution of the cash outflow for mortality. In this paper, a model of an insurance portfolio is used to derive this probability distribution. The problem of obtaining the requisite data for constructing the probability distribution is discussed. The paper ends with a discussion of the use of the probability distribution in a cash management application. Life insurance firms like other companies have a cash management problem. As is the case with physical inventories, holding an inventory of cash is costly. A shortage of cash involves costs associated with deferring the payment of liabilities, liquidating investments prematurely, and accelerating the cash inflow from operations. A surplus of cash involves the opportunity cost associated with lost investment income. The planning horizon for cash management decisions may range