2.2. Forecasting and optimization of monetary cash

This section of work of the financial manager is consolidated to calculation of possible sources and outflow of money. The same scheme, as in the analysis of cash flow is used, only for simplicity some indicators can be aggregated.

As it is rather difficult to predict the majority of indicators with a big accuracy, forecasting of a cash flow is frequent reduce to creation of budgets of money in the planned period, considering only the main components of a stream: realization volume, revenue share in cash, forecast of accounts payable, etc. The forecast is carried out for some period in a section of sub periods: year on quarters, year on months, quarter on months etc.

Anyway procedures of a technique of forecasting are carried out in the following sequence: forecasting of monetary receipts on sub periods; forecasting of outflow of money on sub periods, calculation of a pure cash flow (surplus/shortcoming) on sub periods; definition of cumulative need for short-term financing in a section of sub periods.

The sense of the first stage consists in calculating the volume of possible monetary receipts. A certain complexity in similar calculation can arise in case the enterprise applies a technique of definition of revenue from a measure of shipment of goods. The main source of receipt of money is realization of goods which is subdivided into sale of goods in cash and on credit. In practice the majority of the enterprises traces the average period of time which is required to buyers to pay bills. Proceeding from it, it is possible to calculate, what part of revenue for the realized production will arrive in the same sub period, and what in the following. Further by means of a balance method in the chain way count monetary receipts and change of receivables. The basic balance equation has an appearance:

Rb + SP = Re + MR,

where:

Rb- receivables for goods and services for the beginning of a sub period,

Re - receivables for goods and services for the end of a sub period;

SP - sales proceeds during the sub period;

MR - monetary receipts in this sub period.

More exact calculation assumes classification of receivables by terms of its repayment. Such classification can be executed by accumulation of statistics and the analysis of actual data about repayment of receivables for the previous periods. The analysis is recommended to be done on months. Thus, it is possible to establish an average share of receivables with a repayment period respectively to 30 days, till 60 days, till 90 days, etc. In the presence of other essential sources of money (*other realization, non-operating operations) their projection is carried out by method of the direct account; the received sum is added to the sum of monetary receipts from realization for this sub period.

At the second stage outflow of money pays off. Its basic component is repayment of accounts payable. It is considered that the enterprise pays the bills in time though somewhat it can delay payment. Process of a delay of payment is called "extension" of accounts payable; the delayed accounts payable, in this case acts as an additional source of short-term financing. In the countries with the developed market economy there are various systems of payment of goods, in particular, the amount of payment is differentiated depending on the period during which payment is made. When using similar system the delayed accounts payable becomes quite expensive source of financing as the part of the discount provided by the supplier is lost. The salary of the personnel, administrative and other constants and variable expenses, and also capital investments, payments of taxes, percent, dividends belong to other directions of use of money.

The third stage is logical continuation two previous: by comparison of the predicted monetary receipts and payments the pure cash flow pays off.

At the fourth stage the cumulative need for short-term financing pays off. The sense of a stage consists in determination of the size of the short-term bank loan on every sub period, necessary for providing the predicted cash flow. At calculation it is recommended to take into account a desirable minimum of money on the settlement account which is expedient for having as an insurance stock, and also for the possible not predicted in advance favorable investments. We will consider a forecasting technique on an example.

Example

There are following data on the enterprise.

1. On average 80% of production realize the enterprise on credit, and 20% - in cash. As a rule, the enterprise grants to the contractors the 30-day loan on favorable terms (for simplicity of calculations we neglect the privilege size in this example). The statistics shows that 70% of payments are paid by contractors in time, t. with, within the month provided for payment, other 30% are paid within the next month.

2. Realization volume for the III quarter of the current year will make (million rubles): July - 35; August - 37; September - 42. The volume of the realized production in May is equal 30 million, in June - 32 million rubles. It is required to make the budget of money for the III quarter. Calculation is carried out by the technique given above and can be issued in the form of the following sequence of analytical tables (tab. 2.1, 2.1,2.3).

Table 1.2

Dynamics of monetary receipts and receivables (one thousand rub.)

Indicators	July, August, September
Receivables (for the beginning of the period)	15,017,920,2
Sales proceeds	35,037,042,0
Including realization on credit	28,029,633,6
Receipt of money	32,134,737,5
Including. 20% of realization of the current month in cash	7,07,48,4
70% of realization on credit last month	17,919,620,7
30% of realization on credit month before last	7,27,78,4
Receivables (for the end of the period)	17,920,224,7

DEFINITION OF THE OPTIMUM LEVEL OF MONEY

Funds of the enterprise include money in cash desk and on the settlement account in commercial banks. There is a question: why these cash remain free, but aren't used, for example, for purchase of the securities which are bringing in the income in a type of percent? The answer is that money is more liquid, than securities. In particular, it is impossible to pay off with the bond in shop, a taxi, etc.

Different types of the current assets possess various liquidity as which understand the time period necessary for converting of this asset in money, and expenses on ensuring this converting. Only absolute liquidity is inherent in money. In time to pay bills of suppliers, the enterprise has to possess a certain level of absolute liquidity. Its maintenance is connected with some expenses which exact calculation in principle is impossible. Therefore it is accepted as the price to take the possible income from investment of the average rest of money into the state securities for maintenance of necessary level of liquidity. The basis for such decision is the prerequisite that the state securities without - risky, it is possible to neglect degree of the related risk more precisely. Thus, money and similar securities belong to the class of assets with identical degree of risk, therefore, the income (costs) for them is comparable.

However the above doesn't mean that the stock of money has no top limit. The matter is that the price of liquidity increases as the stock of cash increases. If the share of money in assets of the enterprise low, their small additional inflow can be extremely useful, in the return case on the contrary. The financial manager is faced by a task to determine the size of a stock of money proceeding from that the price of liquidity didn't exceed marginal interest income on the state securities.

From a position of the theory of investment money represents one of special cases of investment into inventory items. Therefore the general requirements are applicable to them. First, the basic stock of money is necessary for performance of the current calculations. Secondly, certain money is necessary for a covering of contingencies. Thirdly, it is expedient to have a certain size of free money for ensuring the possible or predicted activity expansion.

Thus, the models developed in the theory of stockpile management and allowing to optimize the size of money can be applied to money. It is about estimating: a) total amount of money and their equivalents; b) what their share should be held on the settlement account, and what in the form of the fast-realized securities; c) when and in what volume to carry out mutual transformation of money and the fast-realized assets.

In the western practice the greatest distribution was gained by Baumol's model and Miller's model - Orr. The first was developed by V. Baumol in 1952. the second - M. Miller and D. Orr in 1966. Direct application of these models in domestic practice is still complicated in view of strong inflation, abnormal discount rates, backwardness of securities market and so-called therefore we will provide only the short theoretical description of these models and their application on conditional examples.

CHAPTER III. IMPROVEMENT OF MANAGEMENT OF IN CASH OF THE ENTERPRISES

Improvement of management of in cash of the enterprises consists in the correct analysis of monetary receipts and definition of their type. From that it is how right the assessment of a cash flow is made success of the financial decision depends. One of basic elements of such financial analysis is the assessment of a cash flow of C1, C2..., Cn generated during a number of the temporary periods as a result of implementation of any project or functioning of this or that type of assets.

C1 stream elements, can be either independent, or connected among themselves by a certain algorithm. The temporary periods to a bowl of all are assumed by the equal. Besides, for simplicity of a statement of material it is supposed that elements of a cash flow are unidirectional, i.e. there is no alternation of outflows I inflows of money. Also it is considered that the receipts generated within one temporary period take place or at its beginning, or in its end, i.e. they aren't distributed in the period, and concentrated on one of its borders. In the first case the stream is called as a stream prenumerando, or advance, in the second - a stream postnumerando.(pic. 1.1)

Picture1.1

In practice bigger distribution was gained by a stream postnumerando, in particular, this stream is the cornerstone of techniques of the analysis of investment projects. Some explanations for it can be offered proceeding from the general principles of the account according to which it is accepted to sum up the results and to estimate financial result of this or that action on the ends of the next reporting period. As for receipt of money on account of payment, in practice the eye is most often distributed in time unevenly and therefore it is more convenient to refer all receipts to the end of the period conditionally. Thanks to this agreement the equal temporary periods that allows to develop the convenient formalized algorithms of an assessment are formed. The stream prenumerando matters in the analysis of various schemes of accumulation of money for the subsequent their investment.

The assessment of a cash flow can be carried out within the solution of two tasks: a) the straight line, i.e. carries out an assessment from a future position (the scheme of capacity is realized); b) the return, i.e. carries out an assessment from a present position (the scheme of discounting is realized).

The direct task assumes a total score of the increased cash flow, i.e. future cost is its cornerstone.

The return task assumes a total score of the discounted (given) cash flow. As separate elements of a cash flow are generated in various time intervals, and money has temporary value, their direct summation is impossible. The main result of calculation is determination of the total value of the given cash flow. The settlement formulas used thus are various depending on a type of a stream - postnumerando or prenumerando.

It should be noted that the key moment in the considered schemes is the silent prerequisite that the analysis is kept with a position of "the reasonable investor", and immediately investing them for the purpose of obtaining the additional income. By it is explained that fact that at an assessment of streams in both cases, i.e. both at capacity, and when discounting, capitalization according to the scheme of difficult percent is supposed.

ASSESSMENT OF THE CASH FLOW WITH UNEQUAL RECEIPTS

The situation when monetary receipts by years vary, is the most widespread. The general problem definition in this case such is.

Let C1, C2,… .Cn - a cash flow; r - discounting coefficient. The stream which all elements by means of the discounting multipliers are brought to one timepoint, namely - by the present moment, is called brought. It is required to find the cost of this cash flow from a position of the future and from a present position.

ASSESSMENT OF THE FLOW OF POSTNUMERANDO

The direct task assumes an assessment from a future position, i.e. for the end of the period and when the scheme of capacity is realized.

The return task means an assessment from a position of a present situation, i.e. for the end of the period of the Lake. In this case the scheme of discounting is realized, and calculations need to be conducted on the given stream. Elements of the given cash flow can already be summarized; their sum characterizes brought, or flowing, the cost of a cash flow which if necessary can be compared to the size of initial investment.

ASSESSMENT OF ANNUITIES

One of key concepts in financial and commercial calculations is the concept of annuity. The logic put in the scheme of annuity payments widely is used at an assessment of debt and share securities, in the analysis of investment projects, and also in the analysis of rent.

ASSESSMENT OF URGENT ANNUITIES

The annuity represents a special case of a cash flow, namely, it is a stream in which monetary receipts in every period are identical in size. If the number of equal time intervals is limited, the annuity is called urgent. In it cases:

C1 = C2 = … … = CN = A

Postnumerando regularly arriving rent payments for use of the leased land plot can be an example of urgent annuity in case the contract provides regular payment of rent after the next period. The scheme of periodic monetary deposits on the bank account at the beginning of every month for the purpose of accumulation of the sufficient sum for large purchase acts as urgent annuity prenumerando, for example.

For an assessment of future and specified cost of annuity it is possible to use the considered computing formulas, at the same time thanks to specifics of annuities concerning equality of monetary receipts these formulas can be significantly simplified.

METHOD OF THE DEPOSIT BOOK

It is possible to give other interpretation of calculation of the current cost of annuity by means of a method of "the deposit book", which logician such is. The sum put on the deposit brings in the income in a type of percent; at removal from the deposit of some sum the basic size with which percent are charged, decreases. Just this situation also takes place in a case with annuity. The current cost of annuity is the size of the deposit with the total amount of the due percent which is annually decreasing by the equal sums. This sum of annual payment includes the percent added for the next period, and also some part of the main amount of debt. Thus, repayment of an initial debt is carried out gradually during all period of validity of annuity. The structure of annual payment constantly changes - initial stages in it prevail the percent added for the next period; eventually the share of percentage payments constantly decreases and raises a share of repayable part of a principal debt. We will consider logic and calculating procedures of a method on the elementary example.

Example

In bank the loan for five years in the sum 20000 dale, under 13% per annum charged according to the scheme of difficult percent on an unpaid balance is obtained. It is necessary to return the equal sums at the end of every year. It is required to determine the size of annual payment.

For the best understanding of logic of a method deposit the book it is expedient to argue from the creditor's position. For bank this contract represents investment at a rate of 20000 dale., i.e. outflow of money, as it is shown on the scheme. Further within five years the bank will annually receive the sum in the end of the year And, and each annual payment will include percent for the expired year and part of the main amount of debt. So, as within the first year the borrower used the loan at a rate of 20000 dale., payment which will be having made at the end of this year, consists of two parts: percent in a year in the sum 2600 dale. (13% from 20000) and repayable part of a debt in the sum (And - 2600 dale). Next year calculation will be repeated provided that the size of the credit which the borrower possesses, will make already smaller sum in comparison with the first year, namely: (20000-A + 2600). From here it is visible that eventually the sum of percent decreases, and the share of payment increases. This financial contract can be presented in the annuity form postnumerando in which its current cost, an interest rate and duration of action is known. Therefore for finding of size annual payment And it is possible to use a known formula.

ANNUITY ASSESSMENT WITH THE CHANGING PAYMENT SIZE

In practice situations when the size of payment changes towards increase or reduction over time are possible. In particular, at the conclusion of lease contracts in the conditions of inflation the periodic increase in payment compensating negative influence of the change in price can be provided. The annuity assessment in this case can be also carried out by simple calculations by means of financial tables. We will consider technology of calculations on the elementary example.

Example

The site for ten years is leased. The rent will be carried out annually according to the scheme postnumerando with the following provisions: in the first six years 10 million rubles, in the remained four years 11 million rubles. It is required to estimate the specified cost of this contract if the interest rate used by the analyst is equal 15%.

It is possible to solve this problem in various ways depending on what annuities will be allocated by the analyst.

First of all we will note that the specified cost of a cash flow has to be estimated from a position of the beginning of the first time interval. We will consider only two versions of the decision from several possible. All these options are based on property of additivity of the considered algorithms concerning the size of annuity payment.

1. The initial stream can be imagined as the sum of two annuities: the first has And = 10 and ten years proceed; the second has And = 1 and four years proceed. On a formula it is possible to estimate the specified cost of each annuity. However the second annuity in this case will be estimated from a position of the beginning of the seventh year therefore the received sum needs to be discounted by the beginning of the first year. In this case estimates of two annuities will be brought to one timepoint, and their sum will give an assessment to the specified cost of an initial cash flow.

PV = 10*FM4 (15%, 10) + FM2 (15%, 6) * 1*FM4 (15%, 4) =

= 10*5,019+2,855*1*0,432=51,42 million rubles.

2. The initial stream can be imagined as a difference of two annuities: the first has And = 11 and ten years proceed; the second has And = 1 and, having begun in the first year, comes to an end in the sixth. In this case calculation looks so:

PV = 11*FM4 (15%, 10) - 1*FM4 (15%, 6) =

=11*5,019-1*3,784 = 51,42 million rubles.

TERMLESS ANNUITY

The annuity is called termless if monetary receipts proceed rather long time (in the western practice the annuities calculated on 50 and more years belong to the termless).

Example

To determine the current cost of termless annuity with annual receipt of 420 thousand rubles if the percent on fixed deposits offered by the state bank is equal 140/0 annual.

PV = 420: 0,14 = 3 million rubles.

Thus, if the annuity is offered at the price which isn't exceeding 3 million rubles, it represents favorable investment.

Conclusion

Summing up the result it is possible to draw the following general conclusions:

1. Management of cash flows is one of the most important activities of the financial manager. It includes calculation of time of the address of money (a financial cycle), the analysis of a cash flow, its forecasting, definition of an optimum level of money, drawing up budgets of money.

2. The purpose of management of money consists in investing surplus of the monetary income for receiving profit, but at the same time to have their necessary size for implementation of obligations for payments and simultaneous insurance on a case of unforeseen situations.

3. The analysis of cash flow allows to explain with a known share of accuracy a divergence between the size of the cash flow taking place at the enterprise in the reporting period and the profit got for this period.

4. The models developed in the theory of stockpile management and allowing to optimize the size of money can be applied to money. In the western practice the greatest distribution was gained by Baumol's model and Miller's model - Orr.

5. Improvement of management of in cash of the enterprises consists in the correct analysis of monetary receipts and definition of their type. One of basic elements of such financial analysis is the assessment of a cash flow like postnumerando and prenumerando, a widespread special case of these streams is the annuity.

List of references

Financial management by firm, M. Ekonomika, 1998

Reference book of the financier. 1998

Sheremet A.D., Saifullin, Finance of the enterprise. M. Ekonomika 1998

Kovalyov V. V. Financial analysis, M. Ekonomika 1998

Financial management by firm, M. Ekonomika, 1998, page 322

Financial management by firm, M. Ekonomika, 1998, page 329

Financial management by firm, M. Ekonomika, 1998, page 322

Financial management by firm, M. Ekonomika, 1998, page 349

Financial management by firm, M. Ekonomika, 1998, page 355

Financial management by firm, M. Ekonomika, 1998, page 360

Kovalyov V. V. Financial analysis, M. Ekonomika 1998, page 249