CHOICE OF TECHNIQUE - Working Capital Management

We have discussed above various techniques of forecasting cash flow – both inflows and outflows useful to the management in their task of managing liquidity in the business. The obvious question at this stage is, which is the best technique of forecasting that a manager should adopt in his/her firm? This is a question of which no categorical answer can be given. This is because the techniques discussed above need not be suitable to each and every firm and hence generalization cannot be made in this regard. Depending upon its individual requirements, it may said that instead of relying on just one technique, it is always better to use a combination of approaches. But all this has to be customized to the forecasting requirements of the company. It has been observed that the following factors generally influence firms in their choice of cash flow forecasting technique:

  1. The nature of company’s business in terms of degree of control exercised over cash inflows and cash outflows.
  2. Forecasting period.
  3. Degree of managerial appreciation and acceptance of advanced and sophisticated managerial techniques.
  4. Degree of accuracy required.
  5. Development and operational costs.

According to a survey (Parashar: 1986) about 65% of the companies polled prepared systematic cash flow forecast on regular basis whereas the remaining 35% either did not prepare or prepared only occasionally typically when faced with a situation of credit crunch, financial losses or cash shortages. Projected receipt and disbursement has been the most commonly followed framework. Some companies adopted proforma fund flow/cash flow framework also but the use of proforma balance for each flow forecast was almost non-existent. The use of expert or direct estimate for developing cash flow forecast values was not common; accounting ratios and statistical techniques were used exceptionally only. Though of late it has been observed that many large companies use computers for preparing cash flow forecasts.

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Working Capital Management Topics