Showing papers on "Cash flow forecasting published in 1986"

Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers

Abstract: The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

The association of operating cash flow and accruals with security returns

Abstract: The relative association of operating cash flows and accounting earnings with security returns is addressed in several research papers. Any information that earnings provide about operating activities that is incremental to the information provided by cash flows is a function of the accrual adjustment process that transforms cash flows into earnings. The usefulness and reliability of accruals in a valuation context has been challenged by members of the financial community.1 The accrual process is criticized because it is based on historical cost and because reported

Earnings versus Cash Flow as a Predictor of Future Cash Flow Measures

Abstract: The FASB has asserted, without proof, that information about an enterprise's earnings based on accrual accounting generally provides a better indication of a company's ability to generate favorable cash flows than information about cash flows themselves. This study tests that assertion, empirically. The test results provide empirical evidence supporting the FASB's contention.

Deterministic cash flow management: State of the art and research directions

Abstract: Cash flow management has attracted the increasing attention of both academicians and practitioners in recent time. There is increasing emphasis on cash management as a vital organizational function and evidence indicates that the role and responsibilities of cash managers are expanding beyond conventional boundaries. In an earlier article, Gregory presented an excellent review of a limited class of cash management models. This paper attempts to review the rather large body of deterministic cash flow models that were not reviewed by Gregory. The review places the models in proper perspective by identifying the underlying decision processes and points out the somewhat narrow focus of these models. A modified taxonomy of cash management decisions is suggested as a possible framework for future research. The paper also recognizes the tremendous growth in information and computer technology and its implications for normative modeling efforts in cash management.

Cash Flow Accounting

Abstract: Profit, cash and financial position. Fundamentals of accounting. Traditional system of accounting. Testing the traditional system. A unified system of cash flow reporting. Arguments for a CFR system. Analysis of actual cash flows. Analysis of realizable earnings and financial position. Further issues and thoughts.

Alternative Cash Flow Measures and Risk-Adjusted Returns

Abstract: This paper compares different definitions of cash flow in terms of their incremental explanatory power over historical cost earnings by reference to changes in equity share prices. Two refined definitions of cash flow as well as a crude definition are examined. The results indicate that no improvement in association with risk-adjusted security returns is obtained by using the refined cash flow definitions.

A Reexamination of the Covered Call Option Strategy for Corporate Cash Management

Abstract: Traditionally, corporations faced with the problem of managing short-term cash reserves have relied almost exclusively on investments in the money market. Recently, however, financial strategists have developed several innovations designed to take advantage of the benefits of short-term equity participation. Most notable among the methods suggested thus far is the \"hedged dividend capture\" plan, wherein the stock of a company about to pay a dividend is purchased at the same time a call option is sold. The resulting covered call position is then liquidated soon after the dividend is received. The primary advantage of this scheme is the company's ability to obtain the 85% tax exclusion on dividend income while protecting against price fluctuations in the underlying stock issue. Indeed, the rewards of employing the hedged dividend capture approach can be dramatic. Brown and Lummer [1] found that the covered call technique led to an almost 300% increase in the after-tax yield offered by Trea-

Understanding Cash Flow: A System Dynamics Analysis

Abstract: UNDERSTANDING CASH FLOW: A SYSTEM DYNAMICS ANALYSIS* Working capital management is vitally important to the success of the small business. If sales vary during the year because of seasonality, growth, or uncertainty, then working capital is difficult to control. The firm's current assets and liabilities (in particular, receivables, inventory, and short-term payables) change in response to sales fluctuations. As a result, cash flow may sometimes be inadequate to sustain operations, even though profitability is satisfactory over the whole year. * The author wishes to acknowledge the support and advice of Ray Shreckengost of RSS Associates, Dr. Herb Myers and Dr. John Clark of Nova University. This paper summarizes the first stages of a research project which uses System Dynamics to improve financial control in small businesses. Further detail and model documentation are available on request. Improving cash flow management is a major priority for many small businesses. The advent of the microcomputer makes improved planning possible, but there is a related need for modeling approaches which illustrate the realities of small business. One such method, financial simulation using System Dynamics, is described in this article. It has been used by the author to aid cash flow management in firms which suffer from uneven sales. This technique provides a more comprehensive understanding of the causes of working capital changes and suggests what, if anything, can be done to improve the situation. The second part of this article includes an explanation of the way in which cash flow management problems can affect the small firm. Part three briefly describes the System Dynamics approach and the way in which such models are constructed. In part four, the working capital position of a case study business is analyzed, and the causes of fluctuations in current assets and liabilities are explained. CASH FLOW MANAGEMENT A number of analysts have pointed out that the financial "rules of the game' are distinctly different for the small business.1 The vast majority of small firms are undercapitalized. As a result, they depend on various sorts of short-term financing such as accounts payable, accruals, and lines of credit. Problems arise because these must be liquidated periodically. This, in turn, means that cash must be generated from elsewhere in the business in order to meet these obligations. At a time when sales, inventory, and receivables are in a state of flux, it is difficult for the manager to be sure of an adequate cash flow. In this sense, working capital management is about the timing as well as the size of current assets and liabilities.2 1 See, for example, J. A. Welsh and J. F. White. "A Small Business Is Not a Little Big Business,' Harvard Business Review (July August 1981). 2 J. L. Lyneis developed this approach in "Designing Policies to deal with Limited Financial Resources,' Financial Management (Spring 1975). Problems of liquidity adjustment are especially difficult for the seasonal business. One must bear in mind that rules of thumb such as "cash flow equals after-tax profit plus depreciation' are inadequate guides for financial managers when sales are not uniform due to important differences in the timing of cash flow and profitability.3 This distinction is especially important for the small firm, because generating sufficient cash to satisfy creditors is essential for short-run survival. Profitability, by contrast, is a much more abstract concept which applies over the long term. 3 A. R. DeThomas explains the interconnections between cash flow and profit using an accounting model in "Ins and Outs of the Flow of Funds,' American Journal of Small Business (July-September 1982). Evidence suggests that many firms are ill-equipped to make the difficult decisions involved in cash flow management. …

Effects of Federal Taxes on Member Cash Flows From Patronage Refunds

Abstract: Scheduled changes in Federal Insurance Contributions Act (FICA) tax rates will affect member net cash flow when a patronage refund is received from a cooperative. Cash patronage refunds at the minimum 20 percent level generally required by law will create negative cash flows for patrons in very low tax brackets. Negative cash flows accumulated over the 10-year period 1980-90 may result in opportunity costs to patrons that exceed the value of the refunds. Boards will need to consider one or more of the following strategies to deal with this problem: (1) increased cash patronage refunds, (2) shorter revolving periods, and (3) use of nonqualified written notices of allocation.

Cash crop production and the balance of trade in a less developed economy: a model of temporary equilibrium with rationing

Abstract: This paper investigates a model of temporary equilibrium with rationing for a l ess developed economy (e.g., Tanzania) suffering balance-of-payments problems as a result of declining cash crop production. The model consists of an agricultur al sector producing cash and subsistence crops, an industrial sector, and a fore ign trade sector. It shows that declining cash crop production may be dueprimar ily to rationing of industrial goods and that increasing the producer price of t he cash crop-whether relative to the subsistance crop or the general price level -may have perverse effects. Copyright 1986 by Royal Economic Society.

Financial risk management alternatives in a whole-farm setting

Abstract: Risk programming and simulation methods are used to analyze the opportunity to reduce whole-farm risk in a diversified cash crop farm through reduced leverage and/ or adjustments in rental arrangements. These two financial strategies are shown to extend the ability of the farm operator to manage downside risk beyond the singular effects of a diversified farm plan. The analysis indicates that a trade-off occurs between these strategies, but that the reduction of debt has a greater impact on the distributions of net cash flow (before taxes) and outstanding term debt.

Discussion of The Association of Operating Cash Flow and Accruals with Security Returns

Abstract: The discussion of "The Association of Operating Cash Flow and Accruals with Security Returns" may be divided into two related areas. First, many comments referred to model specification and potential sources of measurement error. The rest of the comments dealt with the basic research questions addressed by the study and what is to be learned from this line of research. Though the comments in these two areas were interspersed, I summarize them separately for convenience and clarity.

An integrated cash flow model of the firm

Abstract: This paper develops an integrated model that links short-run financial management (SRFM) information to the net present value approach. The model is developed within the framework of value maximization under conditions of certainty and uncertainty. The objectives are to expand the model of Sartoris and Hill by including all of the key SRFM variables, developing interrelationships among various SRFM variables and introducing the effect of forecasting errors on inventories, net cash flow shortfalls and excesses. A timeline is developed to highlight the effect of a firm's competitive position on its credit terms and the speed that it collects and disburses cash. A primary contribution of the paper is to show that SRFM variables affect the magnitude and timing of cash flows and are directly related to the value creation process. By integrating the SRFM variables into the long-run financial planning process, fresh insights concerning the creation of firms' value are introduced. In summary, the model highlights the complex interdependencies that exist between SRFM variables and firm value. AN INTEGRATED CASH FLOW MODEL OF THE FIRM

Managing cash flow risks in stock index futures

Abstract: 1 74 m 5 T he DurDose of this DaDer is to orovicle inI I I I 53 5 stitutional users of stock index futures contracts with an analytical model for assessing and monitoring their potential funds or liquidity needs during the implementation of index futures trading programs, Regardless of the particular use of stock index futures that is employed, managers are finding that considerable attention must be devoted to monitoring the cash flow resulting from the daily resettlement of these contracts. A lack of attention to this often overlooked aspect of futures trading has the potenti,d for catching the manager cash short, thereby necessitating selling equity holdings or closing some of the futures position action that can have damaging implications for portfolio performance. The paper is organized as follows. First, we briefly review some of the many uses of stock index futures in portfolio management and describe thle important relationship that daily resettlement will have in conjunction with these strategies. We then introduce a model that has been used previously in the futures literature for describing optimal margin setting behavior on the part of the exchanges. We adapt this model to the problem at hand and generate a set of tables that provides managers with the necessary liquidity requirements they should maintain, given the probability they are willing to accept of exhausting the liquidity pool and given their portfolio’s size, in-

Mortgage‐equity cash flow analysis

Abstract: This paper synthesises the mortgage‐equity capitalisation technique, often used in property investment analysis and valuation practice in the United States of America, and the equated yield technique used in the United Kingdom The mortgate‐equity technique considers two components of value, namely, debt and equity It is usually applied to the nett income receivable in the first year, (conventional income capitalisation) Equated yield is a form of cash flow analysis which allows for the assessment of rental income projections The combination of the two techniques, where debt capital is treated as an actual series of cash flows, leads to a discounted cash flow rate of return being available for equity capital This measure should be of interest to property companies and occupying investors The approach is demonstrated using a simple example, and some sample tables of equated yield on equity are appended

The Demand for Cash by Corporations

Abstract: The interest in the study of behaviour of the transactions demand for cash by corporations has been stimulated by Baumol (1952), Tobin (1956), and Friedman (1959). Baumol and Tobin suggested that there are economies of scale in cash holdings and transactions elasticity of cash balances is 0.5. Friedman’s results showed a permanent income elasticity of 1.8. The other later studies on demand for cash by firms either supported Baumol and Tobin or Friedman. Among others, Frazer (1964), Nadiri (1969), and Coates (1976) supported Baumol and Tobin while Meltzer (1963 June, 1963 August), Whalen (1965), De Allessi (1966), and Vogel and Maddala (1967) supported Friedman. Those who supported Baumol and Tobin found that under moderately restrictive assumptions optimal transactions cash balances very less than in proportion to sales and those who supported Friedman found that the elasticity of cash with respect to sales is about or more than unity.There is also no unanimous finding as regards to the effect of interest rate on demand for cash. Among others, Selden (1961), De Allessi, Nadiri, and Coates showed the statistically significant negative relationship between interest rates and demand for cash while Friedman did not find the same. It all shows that there is no unanimous finding with respect to the economies of scale in cash holdings, and the interest cost effect on demand for cash. In order to validate one view or the other, no study has so far been conducted in the context of Nepal. This paper therefore tests out the models that will either support or reject the Baumol-Tobin hypothesis.Section I of this paper describes the models that attempt to explain firm’s demand for cash and the nature and sources of data used in the statistical analysis. The regression results are presented and interpreted in Section II. Finally, the empirical findings are summarised and the conclusions are indicated in Section III.The major conclusion indicated by this paper is the empirical evidence in support of the presence of the economies of scale in cash holdings, significant effect of interest cost on investment in cash, and the slow speed of adjustment between actual and desired level of cash.

A system for forecasting and monitoring cash flow as an aid to rational financial planning

Abstract: The research on which this paper is based was performed as part of a study to develop an improved system for generating a 2-year forecast of monthly cash flows for the Virginia Department of Highways and Transportation. It revealed that current techniques used by the department to forecast right-of-way payments; salaries and wages; and allocations to cities, counties, other state agencies, and transit properties require no change. On the other hand, it showed that forecasts of expenditures on materials, supplies and equipment, and maintenance contracts have overestimated actual cash outlays by significant margins. In addition, this research revealed that success in forecasting federal revenue reimbursements is, at best, likely to be spotty and that forecasts typically will be overly optimistic. For state revenues, official forecasts approved by the Office of the Secretary of Transportation of Virginia serve as the basis of the official cash forecast; nevertheless a technique is proposed for early identification of significant changes in state revenue collections. The use of techniques derived from this research in a December 1983 forecast of cash flows for January through July 1984 showed that the estimated cash balance for the end of the period was within $4 million of the actual balance. As of August 1985 the forecast was within $11 million of the actual balance. Among the major recommendations is that it may be reasonable to establish cash balances at contingency levels consistent with the expected excess of expenditures over revenues for the months of July through October.