Suppose a firm’s cash flows do not occur uniformly throughout the month. What effect would this have on the accuracy of the forecasted borrowing
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Suppose a firm’s cash flows do not occur uniformly throughout the month. What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget? How could the firm deal with this problem? |
Explanation
The gap between cash inflows and outflows causes temporary deficit or surplus.
Sample Response
If cash receipts come in uniformly during the month (1/30 each day), but all outflows are paid on the same day each month, this cash budget would no longer be accurate as the inflows are calculated daily while the outflows are calculated monthly.
In order to avoid this inaccuracy, the firm can modify its timeline in budgeting from monthly to daily. In addition, changing various assumptions such as cash flow effects of change of sales, target cash balance, customers' payments, etc. Variations in these assumptions will show what has to occur to make the financing requirements more favorable.
