Showing papers on "Cash flow forecasting published in 1974"

On the Cash Balance Problem

Abstract: The problem of determining the optimal level of a firm's cash balance has been studied by many researchers. Their analyses differ with respect to the assumptions made about both the cost structure faced by the firm and the nature of the flow of funds to the firm. Because of the different methodologies employed by these authors, a proof of the form of the optimum policy only exists for some assumptions about costs and cash flow conditions. Under other conditions, authors have simply assumed the form of the policy and solved for the parameters of that policy. This paper uses a general dynamic programming formulation of the cash balance problem to derive the form of the optimal cash balance problem under different assumptions about transaction costs and the demand for funds. It consists of a review, synthesis, generalization, and in many cases gives a more rigorous derivation of results. Also the nature of the cash balance problem is expanded in the interest of realism, to allow for access to short-term sources of funds.

A note on the uselessness of transaction demand models

Abstract: CASE M. SPRENKLE (1969), in a refreshing departure from the elasticitygrubbing that constitutes most empirical work on money demand, examined predicted vs. reported levels of cash holdings in firms, using the equation derived by Baumol (1952) and Tobin (1956) as his predictor. Sprenkle concluded that compensating balance requirements, and not asset management decisions taken to cover transaction needs, are the most important data in explaining the amount of cash held by business firms. In this note, I argue that his results do not support his claim of showing "the uselessness of transaction demand models." Rather, they stem from (a) the inadequacy of the Baumol-Tobin (B-T) model as a representation of cash flows, and (b) the irrelevance of cash balance data contained in financial reports to empirical research on money holdings. I also show that Sprenkle's heavy reliance on the importance of compensating balances is misplaced. II. TRANSACTIONS DEMAND MODELS AS PREDICTORS He sets out to show "how little . . . [the B-T model] . . . really explains, how subject to error the results of the theory are, and how fruitless more sophisticated versions of the theory are apt to be." He shows that the model does a poor job of predicting the level of cash holdings in large business firms, and concludes with the obiter dictum that compensating balances determine the levels of business cash holdings. The Baumol-Tobin model depicts the cash flow as a sequence of k receipts per year, each one being followed by a steady stream of payments which just exhaust it. That representation is a priori unreasonable. A large part of any firm's cash transactions are with other firms, so few firms, if any, can show the cash flow pattern assumed in the B-T model. Also, direct evidence from a few firms shows a random mixture of odd-sized daily net receipts and payments. In those observed cases, the running mean of daily cash activity rapidly converges to a value close to zero; the daily flows have no significant underlying periodicity, and certainly no trend or "drift."' The B-T model, by contrast, assumes that the cash account level is extremely periodic, if it is left unadjusted. * NSF research support is gratefully acknowledged. This note is a spin-off from a longer paper that has been presented before several helpful audiences. Thanks are owed to R. Clower, M. Darby, J. Kindahl, A. Leijonhufvud, L. Meyer, R. Schmalensee, C. Sprenkle, and Jack M. Guttentag, for useful comments. The usual disclaimer on sources of error applies. ** Professor of Economics, University of California, San Diego. 1. One day is the ideal interval at which to observe cash flows, since returns on short-term securities can be realized on a daily basis, and banks monitor the demand deposit accounts of their customers once per day.

A Decision Analysis Approach to Cash Flow Management

Abstract: We propose a method of applying the Hespos and Strassmann "stochastic decision tree" framework, originally intended for investment decisions, to cash flow management. Sequences of uncertain events, such as a strike, affecting forecast cash flows are represented by a probability tree. Forecasts of constituent cash flows such as sales and costs are represented by Beta distributions dependent on paths through the tree. Monte Carlo simulations sample these distributions, and equations provided in the model convert the sampled cash flows to cash balances in each period. Frequencies of cash balances weighted by probabilities along paths through the tree yield a combined relative frequency distribution of cash balances for each period. These and related results may be used by management to plan financing arrangements to meet cash requirements in the future.

A Review of Acquisition Valuation Models

Abstract: The article critically examines two methods of acquisition valuation. The first concentrates on a comparison of the earnings per share of the combined companies with that of the acquiror alone on a present value basis. The second method is discounted cash flow model which is based on several established normative models of share price valuation. The article concludes that because of the difficulties in computing an accurate weighted average cost of capital for the combined group and the differences in cash flow and reported earnings, the earnings per share approach is not valid, and therefore the cash flow approach is to be preferred and adopted.

Performance improvement techniques

Abstract: The list (figure 20.1) accompanying this chapter indicates the techniques which should be considered for use in company activities and functions if maximum efficiency is to be gained. This is not to assume that all the techniques have equal value or, indeed, would be applicable in all cases.

Simulation of a corporate cash budget: Application and validation

Abstract: The importance of cash budgeting has been thoroughly discussed in the financial literature, but the application of this technique to actual problems has not been fully developed. The failure to consider the random nature of certain critical financial variables such as sales and purchases is the concern of this paper. Frequently, it is suggested that the financial manager make point estimates of relevant variables such as gross sales and based upon these estimates calculate the resulting net cash flows. The authors of this paper question the validity of point estimates for use in short-term financial decision making.This paper describes the results of an actual simulation of a firm's cash budget. The mathematical model utilized was developed previously by the authors. The modification and application of the model to a specific firm is described along with a step by step description of the actual cash budget simulation. The results of this application are presented along with a discussion of the model validation and a comparison of simulated versus actual end-of-month cash flows. The importance of this research lies in the resulting ability to provide the financial decision maker with a probability distribution of cash flows. Utilizing the probability distribution, the financial manager can select a short-term financial strategy consistent with his attitude toward risk.