Showing papers on "Cash flow forecasting published in 1998"

Are Internal capital Markets Efficient

Abstract: Using segment information from Compustat, we find that the investment by a segment of a diversified firm depends on the cash flow of the firm's other segments, but significantly less than it depends on its own cash flow. The investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single-segment firms. The sensitivity of a segment's investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firm's other segments.

The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing

Abstract: We document that cash flow volatility is associated with lower levels of investment in capital expenditures, R&D, and advertising. Thus, firms do not turn to external capital markets to fully cover cash-flow short falls. Consistent with this conclusion, we document that the sensitivity of investment to cash flow volatility is greater for firms with higher costs of capital market access. In addition, cash flow and earnings volatility are associated with these higher costs. Thus, volatility not only increases the likelihood that a firm will need to access capital markets, it also increases the costs of doing so.

Financing constraints and inventory investment: a comparative study with high-frequency panel data

Abstract: This study provides new evidence of the importance of financing constraints for explaining the dramatic cycles in inventory investment. We compare the empirical performance of different financial variables (coverage ratio, cash stocks, and cash flow) used in previous research to test for the presence of financing constraints. The comparison is undertaken in a common framework with an identical sample and high-frequency (quarterly) firm panel data. Cash flow is much more successful than cash stocks or coverage in explaining the facts about inventory investment across firm size, different inventory cycles, and different manufacturing sectors.

Ownership, liquidity, and investment

Abstract: This article documents a nonlinear relationship between insider shareholdings and the sensitivity of a firm's investment to its cash flow. As insider holdings increase from zero, investment-cash flow sensitivities rise sharply. This relationship weakens at higher levels of insider ownership, and I find some evidence that investment-cash flow sensitivities decrease slowly with insider holdings after a certain point. I argue that these results are inconsistent with the hypothesis that free-cash-flow problems cause the widely noted sensitivity of investment to cash flow. The results are consistent with the presence of asymmetric-information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns.

Regulatory solvency prediction in property-liability insurance: risk-based capital, audit ratios, and cash flow simulation

Abstract: This paper analyzes the accuracy of the principal models used by U.S. insurance regulators to predict insolvencies in the property-liability insurance industry and compares these models with a relatively new solvency testing approach--cash flow simulation. Specifically, we compare the risk-based capital (RBC) system introduced by the National Association of Insurance Commissioners (NAIC) in 1994, the FAST (Financial Analysis and Surveillance Tracking) audit ratio system used by the NAIC, and a cash flow simulation model developed by the authors. Both the RBC and FAST systems are static, ratio-based approaches to solvency testing, whereas the cash flow simulation model implements dynamic financial analysis. Logistic regression analysis is used to test the models for a large sample of solvent and insolvent property-liability insurers, using data from the years 1990-1992 to predict insolvencies over three-year prediction horizons. We find that the FAST system dominates RBC as a static method for predicting insurer insolvencies. Further, we find the cash flow simulation variables add significant explanatory power to the regressions and lead to more accurate solvency prediction than the ratio-based models taken alone.

Traps, Pitfalls and Snares in the Valuation of Technology

Abstract: Unlike ordinary physical and financial assets, innovative technology is disturbingly intangible, often financially invisible, very risky, and dependent on linkages to other assets for realizing its value. OVERVIEW: In a world where financial wizards are seeking to maximize value for shareholders through corporate restructuring, mergers, acquisitions, and spin-offs, there is no escaping the question of how one values technology. The consequences of mis-valuing it, however, can be unfortunate. This article introduces the prevailing free cash flow method for valuation and the significant pitfalls that can occur in misuse of hurdle rates or miscalculating horizon value. It is equally important to recognize that much of the value of RD examples range from Genentech to Netscape. Investment decisions make the need for valuation of technology inescapable. And financial analysis may be too important to leave to the financial analysts. Valuing Assets There is a well-established textbook method for valuing assets, based on discounting future free cash flow from an investment at the rate that can be earned by alternative investments of comparable risk (4, pp. 11-52). Readers unfamiliar with the method would be advised to consult a finance text. I do not quarrel with this approach, and shall summarize it below as a starting point for subsequent discussion. Briefly, free cash flow is the sum of net income, and, if applicable, depreciation, less net capital investments required to sustain the asset. The discount rate is often also referred to as the cost of money (C). Two terms are often used in association with this form of analysis: net present value (NPV) and internal rate of return (IRR). NPV is calculated by discounting the cash flow of each successive year (n) by the cost of money, at a rate (1/C)n. Case A in Table 1 calculates the NPV of a $1000 investment with cash flows of $300/yr for five years, assuming a discount rate of 12%. …

Asymmetric information concerning the variance of cash flows: The capital structure choice

Abstract: This paper assumes that a higher valued firm is distinguished from its lower valued counterpart by having a cash flow distribution with a lower variance. A separating (sequential) Nash equilibrium signaling model is developed in which firms use the levels of debt and dividends to convey information to the market regarding the variance of their underlying cash flow. In contrast to most, if not all, debt signaling models, the higher quality firm signals its value by issuing new equity (decreasing the leverage) while simultaneously offering cash dividends. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Investor Response to Cash Flow Information

Abstract: In this study the usefulness of cash flow data as required by the UK standard, FRS1, is evaluated and cash flow per share is investigated as a possible specification of cash flow data that may contain information value for security markets. Recent innovation in earnings response models are used to test the robustness of the results and provide further insights into the time series properties of cash flow numbers. The findings indicate that the disaggregation of cash flow as required under FRS1 contains information beyond aggregate cash flow but that the required disaggregation is not optimal from an information standpoint. There is little evidence of any incremental information value of cash flow per share over cash flow numbers.

Does Cash Flow Volatility Affect Firm Value? Its Impact on Discretionary Investment and the Costs of Debt and Equity Financing

Abstract: In this paper, we document that cash flow volatility is associated with underinvestment in capital expenditures, R&D, and advertising. Cash flow volatility also increases the costs of accessing capital markets that could be used to cover cash shortfalls. This more costly access, in turn, exacerbates the underinvestment problem. Together, underinvestment and more costly access to capital markets lead to a negative association between volatility and equity value, as measured by market-to-book ratios. Our findings provide direct evidence about the costs associated with both cash flow and accounting earnings volatility.

Kemampuan Laba dan Arus Kas dalam Memprediksi Laba dan Arus Kas Perusahaan Go Publik di Indonesia

Abstract: Financial accounting information is used by potential users to make necessary economic decisions. Earnings and cash flow are some of the measure that show a firms successful management. Earnings are useful for measuring a firms performance, and esti­mating the representative earning, the risk of investing and the cash flow information key measures of liquidity. Accounting information, is not yet one of the fundamental analysis tools for trading in Indonesian Capital Market. However, with increased development, accounting information will be necessary for making important decisions in the capital market. The objective of the study was to test the relationship of the ability of financial information in predicting the benefit of equity investment that consists of earnings and cash flow. The first hypothesis is earning predictor is better than cash flow predictor to predict future earning. Second, earning predictor is better than cash flow predictor to predict future to predict future cash flow. Lastly, earnings have incremental prediction ability to cash flow. There were 288 financial statements of manufacturing firms for the period of 1989-1994 include as a sample. Earnings data used in the tests is from the period of 1989-1994 and cash flow data is from 1992-1994 period. The statistical method used in this research is linear regression. then T-test, regression coeffi­cient, correlation determination and F-test on the 5% level significance. The autocorrelation tests show that there is no linear relationship between independent variables, and that there was no correlation between disturbance factors, because the Durbin Waston test shows value of 2. The statistical results show that earning predictor and cash flow predictor are both significant in predicting earning and cash flow one year ahead, The ability of earning predictor in predicting earning and cash flow is bigger than cash flow predic­tor, this is shown with the regression coefficient. Then is showed that a part from earnings being a tool for predicting earnings, it can be predict cash flows. The results of this research also show F-test is significant, which means that both predictors, earning and cash flow can be used for predicting earning and cash flow efficiently. Key Words: Auditors Ethical Orientation, Ethical Sensitivity, Professional Commitment, Organization Commitment

Financial Management for Farmers and Rural Managers

Abstract: Part 1 Basic Issues: Why bother? In the beginning... Building a framework Cash Flow, Profit and Capital: Cash flow Net Profit Profit statements Capital Capital Statements Depreciation Interpretation of Financial Accounts: Adjusting for realism Interpreting the profit and loss account Interpreting the balance sheet Management Accounts: Management versus financial accounts Gross margin accounts Full cost accounts Allowing for cost behaviour Pricing Variations from the Norm: Farm management accounting Partnerships and companies Voluntary/non-profit organizations Part 2: Basic Budgeting: A profit budget: Introduction Compiling a profit budget Home Farm profit budget A Cash Flow Budget for the Whole Farm: Basic principles Value Added Tax and overdraft interest Cash flow budgets in practice Reconciling cash flow and profit A Budgeted Balance Sheet: Compiling the budget A budgeted balance sheet for Home Farm Budgeting for Incremental Change: Relevant costs and benefits Partial budgets Part 3 Financial History: Recording Cash Flow: Designing a cash recording system The cash analysis system Petty cash Statutory records Recording Profit and Capital: Preparing a profit and loss account Valuing stocks Recording capital The 'Back-up' Records: Introduction Transaction records Physical records Stock control Background records Organizing paperwork Post-script Part 4: Controlling the Business: Monitoring Cash Flow: Why monitor cash flow? Comparison of actual and budgeted results Interpreting the results Annual cash flow monitoring Monitoring Profit and Capital: The importance of monitoring profit Comparison with previous years Inter-farm comparisons (1): conventional profit and loss account inter-farm comparisons (2): profit and loss accounts in enterprise account form Budgetary comparisons Variance analysis profit monitoring for Home Farm Monitoring capital Part 5: More on Planning and Control: The Planning Process - A Wider View: Tactics and strategy The mission Setting aims and objectives Assessing 'internal' characteristics and external environment Generating alternative plans Selecting the optimal plan Implementing and monitoring the selected plan Involving other members of the organization Planning for Livestock Enterprises: Introduction Feeding livestock Allocation of forage costs Estimating potential production Replacement of breeding livestock Livestock with long production cycles Labour and Machinery Planning in Farming: Introduction Estimating level of use Estimating labour and machinery costs Investigating alternatives Capital Planning: Introdiction Sources of capital Estimating the cost of capital Comparing alternative uses of capital (1): simple measures Comparing alternative uses of capital (2): discounted cash flow techniques Allowing for Risk and Uncertainty: Introduction Allowing for risk and uncertainty in planning Risk and investment appraisal Allowing for Inflation: Introduction Inflation and financial accounts Inflation and management accounts Inflation and planning Inflation and investment appraisal Appendix A. Personal Computers in Management: A.1 Introduction A.2 Computers and farming A.3 General business applications

Earnings Retention as a Specification Mechanism in Logistic Bankruptcy Models: A Test of the Free Cash Flow Theory

Abstract: This paper explores the applicability of as a specification mechanism to improve forecasting methods in corporate bankruptcy. The study combines lessons from Jensen's Free Cash Flow Theory with a logisitic model of bankruptcy to improve forecasting accuracy. The model uses data from the Indian textile industry to show that data classification based on investment opportunities is yet another way of improving precision. The study also re-examines the Free Cash Flow Theory and concludes that in applying it to a bankruptcy scenario, its initial findings regarding retention policy hold true; that is, low growth firms should retain less of their earnings than their high growth counterparts.

Networks and the fiscal performance of rural hospitals in Oklahoma: are they associated?

Abstract: This paper uses regression analysis to explore the relation of network membership to the financial performance of rural hospitals in Oklahoma during fiscal year 1995. After adjusting for the scope of service, as measured by the number of facilities or services offered by the hospital, indicators of fiscal status are (1) the cash receipts derived from net patient revenue; (2) the cash disbursements related to operating costs, net of interest and depreciation expense, labor costs and nonlabor costs; and (3) net cash flow, defined as the difference between cash receipts and disbursements. Controlling for the effects of the hospital's structural attributes, operating characteristics and market conditions, the results indicate that members of a network reported lower net operating costs, labor costs and nonlabor expenses per service than nonmembers. Hence, the analysis seems to suggest that the membership of rural hospitals in a network is associated with lower cash disbursements and an improved net cash flow, outcomes that may preserve their fiscal viability and the access of the population at risk to service.

Who Holds Cash? And Why?

Abstract: Cash holdings of nonfinancial firms range widely, and are related to firm size, industry and access to the public bond market. Cash holdings are positively correlated with agency proxies, suggesting that firms that cannot borrow easily due to agency problems hold greater cash stocks--perhaps as a cushion to prevent shortfalls in cash flow from impinging on investment. However, this correlation holds only for the very highest cash holders, especially small firms. The group of afflicted firms appears to be less than one-quarter of COMPUSTAT firms. Cash holdings of a large majority of firms appear to be unrelated to agency problems.

Modelling loan acquisition decisions

Abstract: The present research explores capital requirement models used in medium‐size, private construction firms. The decision‐maker of a contracting firm can implement a cash flow forecasting model as an early warning system by using a model to identify likely cash‐flow problems in advance of the occurrence of these difficulties. Arrangements for acquiring any needed funds from other sources can then be made to avoid the possibility of financial problems in the corporation. In the present research, a model for financial decisionmaking is developed which, as demonstrated in a case study, provides a method of solving borrowing decision problems. The model includes the ability to evaluate qualitative and fuzzy circumstances. The model also assists in the selection of sources of funding, taking into consideration the capital structure ratio, the period of cash requirements, the borrowing limits and the tax conditions of the firm. The purpose of the model is to provide the decision‐maker with a tool kit to analyse her/his financial options.

Impacts of Financial Characteristics and the Boom-Bust Cycle on the Farm Inventory-Cash Flow Relationship

Abstract: The sensitivity of farm inventory investment to movements in cash flow is tested. Inventories should be sensitive to shifts in cash tlow because inventory investment is readily reversible and inventories are a significant portion of assets. Investmentmodels estimated with Kansas farm panel data indicate that: (a) farms absorb internal finance shocks by adjusting inventories, (b) the inventory investment of livestock and high-debt farms are more sensitive to movements in cash flow thancrop and low-debt farms, and (c) inventory investment is more sensitive to cash flow during the 1981–86 bust and the 198’7-92 recovery than during the 1975–80 boom.

Global Cash Management in Europe

Abstract: Global Cash - Europe 96 D. Middleton Security of Computerised Cash Management T. de Caux & A. Walsh Development Prospects in International Cash Management: What Future for the Corporate Bank W. Gerke, G. Pfeufer-Kinnel & A. Burrak Foreign Bank Entry into the Cash Management Markets of Central and Eastern Europe S. Scott-Green The Management of International Cash Transactions and Associated Foreign Exchange Transactions: A Comparative Study of Practices in the UK, Sweden, Scandinavia and Europe G. Bergendahl & A. Birts Cash Management Market Segmentation D. Birks & A. Birts Choosing a Cash Management Bank: Customer Criteria and Bank Strategies P.N.D. Bukh, N.P. Mols & P. Blenker Choosing a Domestic Cash Management Bank D. Birks & A. Birts Customer Relationships: Virtual Banking and Cash Management Services in Italy E. Gualandri & A. Omarini Service Quality in Domestic Cash Management Banks D. Birks & A. Birts Service Quality in an International Cash Management Environment G. Senum & D. Birks Quality and Duration of Bank Relationships S. Ongena & D. Smith Researching Cash Management, Treasury and Electronic Banking Practices D. Birks

Schaum's Outline of Financial Management

Abstract: Schaum's Outline of Financial Management 1.Introduction 2.Analysis of Financial Statements and Cash Flow 3.Financial Forecasting, Planning, and Budgeting 4.The Management of Working Capital 5.Short-Term Financing 6.Time Value of Money 7.Risk, Return, and Valuation 8.Capital Budgeting (Including Leasing) 9.Capital Budgeting Under Risk 10. Cost of Capital 11. Leverage and Capital Structure 12. Dividend Policy 13. Term Loans and Leasing 14. Long-Term Debt 15. Preferred and Common Stock

Corporate groups, liquidity, and overinvestment by Belgian firms quoted on the Brussels stock exchange

Abstract: For a sample of large Belgian non-financial firms quoted on the Brussels stock exchange, it is found that investment of firms borrowing on an internal capital market is not determined by internal cash flow, while cash flow has a significant effect on investment for the other firms in the sample. Further analysis indicates that the cash flow effect is caused by overinvestment, not by financing constraints. No evidence is found that firms borrowing on an internal capital market in turn transfer surpluses of funds to other group members by investing in financial fixed assets. © 1998 John Wiley & Sons, Ltd.

How Closely Do Banks Manage Vault Cash

Abstract: This article examines daily vault cash balances in the Eighth Federal Reserve District to see if banks have been optimizing their vault cash levels. Recent reductions in reserve requirements have not been accompanied by significant reductions in vault cash. This situation suggests that banks may be managing vault cash reserves primarily as precautionary balances to satisfy daily fluctuations in deposits and withdrawals, rather then part of total reserve management. In 1997, some larger banks instituted formal management of vault currency. If this practice spreads, it will have implications for monetary policy and cash operations.

An evaluation of user ratings of cash vs accrual based financial reports in Australia

Abstract: Outlines Australia’s adoption of the direct method of cash flow reporting and presents a survey of 83 loan officers and 76 financial analysts to assess its decision relevance compared with traditional financial statements for commercial loan and investment decisions. Finds both groups (but especially financial analysts) rate cash flow statements more highly across all decisions except performance evaluation; but notes some differences in their relative ratings of the profit and loss account and the balance sheet. Contrasts the findings with other research and recognizes the limitations of the study but suggests that it may provide support for enforcing the direct method of cash flow reporting in other countries, e.g. the USA.

Counting Cash in the Dark

Abstract: This month a new system for managing liquidity goes into use at First Chicago/NBD that will reduce its cash on hand by an amount well into six-figures, which the bank declined to specify. The amount equals 30% of the cash now sitting in its branches and automated teller machines (First Chicago has yet to tackle the vault). The bank will save itself the cost of carrying more cash than it needs, thanks to changed processes and new technology. Once First Chicago realized how much was at stake by better managing cash, says Vice-President Lynn Worland, "There was no way we could not do it." Another institution, Michigan National Bank, has already reaped the initial gains of installing a similar system. Michigan National--which has $9 billion in assets, compared with First Chicago's $112 billion--has eliminated about $33 million in cash. Both banks are the first of their respective technology vendor's clients to have emerged from tests and begun bankwide use of the systems. Last year Michigan National realized a net gain of $1.9 million from investing surplus cash--facilitated by a cash reduction system that was fully operational only for the second half of the year. The bank has removed $20 million from its vault and $13 million from its branch network, where it expects another $5.65 million reduction. The effort to cut cash, and the systems to enable it, are largely in response to a regulatory change that has given banks a new freedom to reduce their casb-based reserves. Another reason is recognition that, gone unchecked, cash keeps creeping up. Donna Dowling, manager of Michigan National's newly-created cash control department, explains that whenever new branch managers are instated, more cash is likely to be ordered. With few formal guidelines for cash ordering, Dowling says, "Branch managers order more than they need because they just have their instincts to base it on." A powerful motivation is fear, fear of running short, says Robert Barry, president of Global Management Technologies Corp. (GMT), one of the two main domestic suppliers of cash forecasting technology. The human element also explains why branches are the most overstocked area. Barry, who says the norm is that cash supply accelerates beyond demand, adds, "We've seen branches with six times more cash than they need." New reg cuts cash The regulatory change mentioned earlier gave banks the right to sweep money from accounts requiring reserves to those that don't has reduced banks' need for cash. "Almost overnight, in a lot of banks the cash level became excessive--it's higher than their reserve requirements," says Ed Herman, a partner in Ernst & Young's national cash management practice in Kansas City, Mo. Other trends are, to a lesser degree, prompting banks to reevaluate their cash situation. One is that some banks are keen to cash in on ATM surcharges by fast deploying more ATMs. However, if banks overstock the machines with cash, it's a big waste of an otherwise investable asset. Norcross, Ga.-based GMT says it has received numerous inquiries from ATM providers looking to make sure that they don't store surplus cash. The high-end estimate of one bank was double its low-end estimate of the amount of cash that should be put in each ATM--a range it deemed too variable to use. Another trend is a growing awareness that banks, striving to improve their efficiency ratios, may have overdone cost-cutting while neglecting revenue generation. "The industry's focus on lowering efficiency ratios has largely eclipsed the significant opportunity to improve profitability by better managing the funding cost of physical cash," says Wyn Lewis, executive vice-president of Carreker-Antinori Inc., Dallas, the other major provider of cash-demand forecasting technology. "A year to six months ago, everybody wanted to talk about sweeps. Now everybody wants to talk about cash reduction. …

Discussion: “Who Uses Interest Rate Swaps? a Cross-Sectional Analysis”

Abstract: In recent years, there have been numerous empirical studies of derivatives use because of new data availability that resulted from requirements for annual report disclosures about derivatives activities of nonfinancial firms (Financial Accounting Standards Board Statements Nos. 105 and 119). Many of these studies test predictions from models of optimal hedging. These models suggest that the use of derivatives to reduce volatility in cash flows is optimal, even though it is costly, when the firm faces even greater exogenous or endogenous costs associated with cash flow volatility. Each of the models assumes the existence of a capital market imperfection that makes cash flow volatility costly. A common approach to testing these models is to examine the cross-sectional variation in the characteristics of firms that use derivatives (or use more derivatives). The explanatory variables represent firm characteristics that the author predicts are related to the proposed costs of volatility that the firm can reduc...

Cash Flow Practices and Procedures in the Lodging Industry

Abstract: This article explores the changing emphasis on cash flow practices and reporting in the lodging industry over the past 5 years. Major findings, based on 172 responses, include more detailed and more frequent reporting of cash flow information by many lodging firms to both internal and external users. Best practices for enhancing cash flows are also reported.

The Usefulness of Aggregated and Disaggregated Cash Flows in Signaling Financial Distress

Abstract: This study compares the incremental usefulness of aggregated net and disaggregated gross cash flows in signaling future firm financial distress. Our study extends previous research because we used actual reported, rather than estimated, cash flows. This study examines a sample of nondistressed firms and firms that became financially distressed in 1991 and 1992 to generate logistic regression models. Logistic regression models were generated to predict a separate holdout sample of 1993 firms. Results show that cash flows have incremental usefulness in explaining financial distress. However, aggregated net cash flows do not capture all the information provided by disaggregated gross cash flows. The only aggregated cash flow useful in signaling future financial distress is net cash flow from operating activities. Several disaggregated gross cash flows are also useful in signaling future financial distress. The two most important disaggregated gross cash flows in signaling future financial distress are taxes paid and interest paid.

A visual approach to the analysis of curve profile: a case in construction industry

Abstract: There are many qualitative and quantitative techniques which have been used for a variety of cases of curve fitting, smoothing and forecasting. All but a few have considered curves from a shape-geometry point of view. The paper argues that curve geometry contains characteristics that are descriptive of the nature of the subject area and therefore provides a viable alternative for the generation of a forecast. In spite of its importance for the success and survival of construction contracting companies, cash flow forecasting and management hasn't been extensively studied by researchers or practitioners. The increased research activity in this field during the 1980s failed to result in the development of a universally accepted alternative to the traditional method of time-related elemental cost build-up. Many of these attempts sought to develop a viable alternative by focusing on mathematical approaches. The non-mathematical approaches to forecasting expenditure flow of construction projects offer a clear explanation as to the origin and nature of the resulting forecast, whereas the mathematical approach to forecasting has the advantage of being simple, cheap and fast. These, mutually exclusive features of the different approaches to model development have lead this work to investigate the possibility of developing a mechanism for mathematical models to facilitate some degree of understanding about the behaviour of project expenditure profile and hence overcome the black-box nature of the mathematical solutions.