From the course: Foundations of Treasury Management

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Prediction and simulation

Prediction and simulation

From the course: Foundations of Treasury Management

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Prediction and simulation

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- Cash flow forecasting is an important treasury management tool for identifying cash flow needs, and for exploring alternative courses of action. To illustrate, let's consider the hypothetical Julian Company with forecasted sales of $50,000 in January and $100,000 in February. All of Julian Company's customers are credit customers. Historically 20% of those customers have made cash payments in the month of sale, and 80% have paid cash in the month following the sale. Let's compute the forecasted amount of cash to be collected in February. First, it's expected that 20% of the February credit sales will be collected in February itself, a $100,000 times 20%, that's $20,000. In addition, it's expected that 80% of the prior month sales in January, will be collected in February, that's $50,000 times 80%, $40,000. Total forecast of cash collections in February are $60,000. It's $20,000 plus $40,000. So…

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