Showing papers on "Cash flow forecasting published in 1992"

Cash forward contracting versus hedging of fed cattle, and the impact of cash contracting on cash prices

Abstract: This research examines cash forward contracting of fed cattle. For an individual feeder, a cash contract eliminates basis risk (as compared to a futures hedge). However, the disadvantage is that the contract price is estimated to be lower than the futures hedge price by $.28 - $.59/ cwt for steers and $.86 - $1.64.cwt for heifers. From the industry perspective, contracting appears to have a negative impact on cash prices. An increase of 1,000 head in U.S. monthly contract cattle shipments is associated with a $.003-$.009/cwt decrease in the U.S. average cash price. The negative impact of cash contracting varies by state.

Tender Offers and Free Cash Flow: An Empirical Analysis

Abstract: High free cash flow firms are characterized by a mismatch between growth opportunities and resources. High free cash flow target firms receive higher-than-average abnormal returns. Target returns are lower when the bidder is a high free cash flow firm. During the 1970s, results suggested that cash-flow-rich bidding firms pursued low-benefit takeovers. During the 1980s, high free cash flow firms became the targets of tender offers. Results are consistent with the notion that reducing agency problems in target firms generates benefits and that bidding firms with large free cash flow undertake low-benefit acquisitions.

Further Evidence on Empirical Relationships Between Earnings and Cash Flows

Abstract: Recently in Australia, regulations have been proclaimed requiring companies to make cashflow disclosures in addition to earnings disclosures from 30 June 1992. This paper provides evidence on relationships between earnings and cash flow measures and in so doing examines the external validity of a U.S.A. study of these relationships by Bowen, Burgstahler and Daley [1986]. We also extend their study through an industry analysis of the relationships. Evidence is presented first that shows low correlations between traditional cash flow measures (i.e., net income plus depreciation and amortisation; and working capital from operations) and a more refined cash flow measure (with additional adjustments for changes in non-cash current assets and current liabilities). Second, traditional cash flow measures exhibit high correlations with earnings, while the more refined cash flow measure has a lower correlation with earnings. Finally, traditional cash flow measures better predict future cash flows than models based on earnings or a more refined cash flow measure. The industry evidence, albeit on small sample sizes, shows that the results on the first two issues, but not the latter issue, are generalisable across industry categories.

Leveraging the underinvestment problem: how high debt and management shareholdings solve the agency costs of free cash flow

Abstract: It is argued that leveraged buyouts (LBOs) provide managers with a powerful incentive to release excess cash rather than invest in negative net present value projects. This incentive is attributed to the large debt obligations associated with “junk” bond financing and to an increase in the shareholdings of top management. In this paper I explore the conditions under which leverage and management shareholdings complement one another in resolving the agency costs of free cash flow and would therefore optimally be used “together” as in an LBO. Complementarity is shown to obtain under plausible conditions, essentially because increased leverage reduces equityholders' share of investment returns. Increased management shareholdings then leverage this underinvestment effect. My analysis also helps explain why top managers who participate in an LBO receive a highly leveraged equity claim rather than a share of the “strip” that is generally provided to outside investors.

The art of managing finance

Abstract: Scope of financial management balance sheet income statement cash budget (cash flow forecast) interpretation funds flow costing overhead costs standard costing budgetary costing marginal costing differential costing (costing for decision making) capital budgeting raising finance gearing - cost of capital management of working capital changing price levels management information technology performance analysis

Managing Environmental Risk and Investment Opportunities to Maximize Shareholder Wealth

Abstract: This article discusses the opinions of environmental experts, corporate strategy, policies, and analytical tools for companies to manage environmental risk and investment opportunities to maximize shareholder wealth. Policies and procedures helpful for evaluating (1) “cost reducing environmentally beneficial investment opportunities” and (2) “environmental contamination clean up options” are discussed and illustrated in detail. As the application of capital budgeting procedures is often the appropriate analytical approach, cash flow forecasting and risk estimation, the foundation of good capital budgeting analysis, is also discussed and illustrated.

The Cash Market in Australia

Abstract: The cash market is the market for overnight loans between financial institutions. This market is central to the operation of Australia’s financial system: it is there that banks seek to borrow or lend in response to short-term fluctuations in their liquidity, and where the Reserve Bank conducts the domestic market operations through which it controls monetary conditions and implements monetary policy changes. This paper outlines a model of the cash market in Australia, which incorporates recent changes in the operating procedures followed by the Reserve Bank. The paper shows how the dynamics of the cash market depend on the presence of both same-day and next-day settlement in the cash market, and how the various interest rates on overnight loans (“cash rates”) are determined.

On the Capital Structure of Leveraged Buyouts

Abstract: A signalling hypothesis of LBO capital structure is examined, wherein the promoters of an LBO unambiguously convey their commitment to generate and distribute free cash flow to investors by assuming debt service obligations high enough to exhaust free cash flow during the initial phase of the LBO operation. The signalling equilibrium results in an equity value consistent with the promoters' expectations concerning free cash flow and permits them to keep the value released by the LBO. The model admits positive probability of default in equilibrium, but equity values are shielded from the costs of financial distress by the adoption of a strip financing arrangement. The promoters have an incentive to adopt strip financing and investors find it not optimal to unbundle the securities making up the strip. Properties similar to those of strip financing are identified in a number of common financial structures and instruments.

Planning cash flow

Abstract: Aimed at helping financial and senior executives manage corporate money more effectively. This problem-solving tool shows how to: predict timing of cash flows; maximize the use of short term credit while minimizing its costs; and prepare an analysis of working capital.

Short and long-term hedging for the corporation

Abstract: Exchange risk hedging in a static (i.e. one-period) setting is extremely straightforward. The variance-minimizing hedge of a particular future cash flow involves a forward contract equal but opposite in sign to the exposure of the cash flow. The exposure is the regression coefficient of the cash flow on the exchange rate. In a multi-period setting, the matter is much less straightforward. Information concerning a future cash flow evolves over time. For that reason, a hedge undertaken early on may have to be revised several times. These revisions themselves increase the level of risk. In this paper I explore the case for deliberately leaving a cash flow unhedged for some time, initiating a hedge at some appropriate time and thereafter, perhaps, leaving the hedge untouched until the cash flow is received or paid. The precise mathematical theory in support of this idea has yet to be developed.

Cash Traps: Small Business Secrets for Reducing Costs and Improving Cash Flow

Abstract: Cash flow analysis as if it matters pruning your payroll costs prudent purchasing reducing utility, phone and postage costs getting the most from your bank minimizing your risks collecting your cash checkbook techniques and tips a contractor's grab bag self-auditing techniques.

Cash Flow, Earnings, and Corporate Control

Abstract: This paper examines the ability of cash flow and earnings based measures of return to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 63 completed takeovers over the period 1977 to 1989, takeover targets have mean cash flow to total assets and earnings to total assets below their industry average in each of the three years preceding the year of the takeover. If these ratios are interpreted as measures of managerial performance, the implication is that target firms were underperformers which may have been taken over for a better use of their asset potential. Target firm abnormal returns observed during the takeover period are significantly related to both the difference between target firm and average industry earnings to total assets and to the difference in cash flow to total assets. Abnormal returns are negatively related to the difference in earnings to total assets, suggesting that target firm assets are indeed underutilized. The difference between target firm and target industry cash flow to total assets is positively related to target firm abnormal returns, suggesting that acquiring firms value the near term cash flow of targets.

Studies in cash flow accounting and analysis : aspects of the interface between managerial planning, reporting and control and external performance measurement

Abstract: Introduction. 1. Assessing Economic Performance and Corporate Financial Policies on a Cash Flow-Market Value Basis 2. Ownership Value-Creation and the Evaluation of Alternative Plans (with H. Chong) 3. Contract Costing and the Negotiation of Contract Prices (with J. van den Berge) 4. The Pricing of Non-Competitive Government Contracts 5. Specifying a Multiperiod Computer-based Financial Model 6. Some Managerial Implications of Working Capital Analysis 7. Zones Ltd 8. The Valuation of a Business as a Going Concern 9. Was Woolworth Ailing? 10. Why the Current UDS Takeover Bids Became Inevitable 11. The Measurement of Corporate Performance on a Cash Flow Basis: A Reply to Mr Egginton 12. Call for SSAP 10 Reform 13. Equity Values and Inflation: Dividends and Debt Financing (with A. W. Stark) 14. Bankruptcy Prediction - An Investigation of Cash Flow Based Models with A Aziz and D. C. Emanual

Net Working Capital Forecasting at Dupont

Abstract: The forecast of working capital is critical in the overall corporate cash flow forecast. It is contingent on a sound understanding of each item of working capital as well as their macro relationships. The individual account forecasts are also important. Bottom-up approach, understanding of historical trends and statistical methods are used for preparing baseline forecasts. Superimposed on them is an understanding of the relationships of current assets and current liabilities, plus judgmental adjustments that come only after having a good understanding of the numbers. Net working capital is defined as current assets minus current liabilities. Current assets here include accounts receivable trade, accounts receivable miscellaneous, inventories, and prepaid expenses. Current liabilities include accounts payable trade, accounts payable miscellaneous, income taxes payable, and other accrued liabilities. WHY NET WORKING CAPITAL FORECASTING In the context of financial forecasting, the change in net working capital is one of several items that comprises the total corporate forecast of cash flow. The impact of working capital is of critical importance in the scheme of the total corporate financial forecast in view of the volatility of this component. Dramatic swings can be experienced very quickly as levels of accounts receivables, inventories and payables respond to changes in sales and production levels. Other elements of the financial forecast tend to be somewhat more stable and/or controllable, and thus easier to forecast. For example, depreciation, depletion and amortization, and dividends are fairly predictable since these are subject to adopted corporate procedures and policies, and are not directly affected by the vicissitudes of the external environment. Net income, however, tends to be more volatile and thus difficult to project. Somewhere in between these items lie other elements of the financial forecast with varying degrees of difficulty to forecast. These include taxes, capital expenditures and other noncash charges and credits. It is the author's experience that the percentage error is most dramatic when it comes to forecasting the change in net working capital for the following reasons: 1. We are involved with two points in time (beginning and ending level of working capital) where the change can be relatively small compared to the level of gross or net working capital. A relatively small change in the absolute amount of either current assets or liabilities can be amplified into a much larger impact on the change in net working capital, and thus the cash flow. 2. We are dealing with several current asset and liability accounts that can change in many ways. 3. It is difficult to understand or establish patterns of changes in current assets and liabilities during various phases of the business cycle. Sometimes the changes in these accounts move concurrent with the business cycle, and other times exhibit a lagged or leading relationship. The following hypothetical illustration shows how a relatively small change in current assets/liabilities can produce a dramatic effect on the change in working capital, cash flow from operations and net cash flow. The increase in net working capital of $25 million as shown in Table 1 was calculated using Alternative "A" in Table 2. (Tables 1 and 2 omitted) Alternatively by assuming a 20% increase in accounts receivable trade in case "B" vs. "A," the increase in net working capital becomes 100% (to $50 million). This produces a.25 % erosion in cash flow from operations, and completely eliminates the positive net cash flow. In view of the above, it is apparent that accurate forecasts of the change in net working capital is imperative. The best way to approach this difficult task is by first thoroughly understanding the composition of each working capital element. After this, an indepth understanding of historical trends, patterns and relationships is necessary. …

Analysis of Cash Flow Statements of Hospitality Corporations

Abstract: (1992). Analysis of Cash Flow Statements of Hospitality Corporations. The Journal of Hospitality Financial Management: Vol. 2, No. 1, pp. 3-12.

Improving Cash Management in the Small Firm: A Risk Adjusted Approach

Abstract: Some firms use some form of cash budgeting. However, the authors, in consulting with over 300 small businesses, have found that most small firms use little or none. Even those that do rarely attempt to adjust cash on hand for risk as measured by variability. The method shown here allows the user to adapt to his or her own level of desired risk, and also allows the use of "what if" type analysis. These analyses may be performed using almost any spreadsheet software and well known statistical manipulations. INTRODUCTION In the competitive world of today, an effective cash management program is an essential ingredient of business success. Cash is the "lifeblood" of a business. The inability to pay bills when due quickly leads to supplier suspicion. This, in turn causes the cash short firm to be placed on COD by suppliers which increases costs substantially, particularly when numerous small orders are needed. Often, small orders are all that can be obtained when suppliers perceive a firm to be in trouble. Bankers also get suspicious when their loan clients start to show signs of cash shortages. They are then prone to increase interest rates, deny further loans (maybe at the most critical point), and may call existing loans (Bennet, 1987). If cash shortages are allowed to continue indefinitely, then business failure is likely. This paper presents a financial planning and management system that aids the business operator in cash management. A method of adjusting the cash balance to account for risk associated with variability is discussed. The model also helps determine the minimum amount of cash required to meet a specific risk level, thus increasing the efficiency of asset utilization. THE IMPORTANCE OF CASH MANAGEMENT Bankers and financial analysts pay particular attention to the common financial ratios that involve cash and near cash items (Cardoza & Smith, 1983; Hopson, Ormsby & Hemingway, 1987; Morris, 1988). Gibson (1987) finds that certified financial analysts ranked quick ratio, current ratio, days' sales in inventory and cash ratio as the top four, in that order, from among fifteen commonly used liquidity ratios. Of these, days' sales in inventory is the only ratio that does not involve cash. Bankers also become suspicious of the need for multiple small loans that were unforeseen (Bennet, 1987; Hopson, Ormsby & Hemingway, 1987). These are the loans that are often brought about by increasing sales, which bring about correspondent increases in required cash, inventory and accounts receivable. This need for loans may be a sign of a healthy growing business, but, if unforecasted, portray exactly the opposite picture. Financial Management Models There are, undoubtedly, a number of financial planning tools available to small business managers. Some of them are quite sophisticated, expensive, and difficult to implement and use. Wilkinson (1987) identifies a number of problems with some models, and also indicates some of the features that should be incorporated to avoid those problems. This Model, In Wilkinson's terminology, what is proposed here is a model that is predictive in purpose, and involves both tactical planning and management control. It is relatively narrow in scope, and has a highly integrated structure. Its degree of aggregation is detailed, and could be operatively interactive if so desired. Its output could be hardcopy and/or softcopy for manager users, A number of spreadsheet software packages are commercially available that are capable of performing the required operations (Wilkinson, 1987, p. 7). The advent of computer spreadsheet software programs has made the problem of cash budgeting Jess onerous and perhaps more error free. They also have made possible the use of tools that incorporate more sophisticated techniques into the process. McEldowney and Ray (1985, p. 97) say that: Spreadsheet packages can generate the most valuable resource for the manager of a small business: time. …