Managers-Net

Explanation:

If a company is unexpectedly short of cash the result can be anything from mildly annoying to disastrous. For example, the company may have to seek an immediate alteration in the overdraft limit, or it may unable to pay salaries. If it has an unexpected surplus, again money is likely to be lost since insufficient time is available to plan the most profitable way to dispose of it. Consequently it is important to be able to forecast the cashflows of the company reasonably accurately in the short, medium and long term.

The technique consists of two component parts.

1. there are the various methods of cash forecasting; this is of crucial importance (e.g. the Balance Sheet Projection Method);
2. there is the daily, weekly and monthly cycle of activity needed to invest surpluses, to borrow to meet shortages and to mobilise cash from investments.

Illustration:

A cash-only grocer has a much simpler problem than an international manufacturing company. It is not just a matter of scale but of complexity. The latter has to make dividend payments, allow for devaluations, finance debtors, have cash available for capital expenditure and so on. In a large company the cash sums handled may be so large that it becomes necessary to appoint full-time specialists to prepare forecasts and co-ordinate day to day and month to month action on investments and cash mobilisation.