Monitoring Cash Uses and Levels

  • Forecasting of cashflows is a key practice in the industry, the Treasury Department forecasts the cash flow upon which fund-related decisions are taken to ensure sufficient funds for day to day operations.
  • However, the forecast is a prediction based on past trends and future expectations which may or may not turn to be true. The companies maintain a cash buffer to manage the deficits in the forecast, but if the deficit turns out to be large the cash buffer cannot manage it completely. On the other hand, if the cash flow turns to be surplus, it should be invested to generate profits.
  • The above problem can be well handled if a proper mechanism for monitoring the cash flows is in place. The monitoring will help us to get an idea of the deviation of actual cash flows from the forecast, if the cash flows are higher than the forecast they may be invested and if they are lower than the forecast than the funds can either be arranged by liquidating some investments or borrowing the funds.
  • In the absence of a proper monitoring mechanism, the company may find it difficult to manage the deviations in the cash-flow forecast and may end up either having a huge cashflow deficit or an unutilized surplus.
  • The monitoring mechanism is the combined process of monitoring the bank balances along with the expected outflow or inflow of cash. The company may opt for a target balance, below which it can consider the cash flow to be a deficit.

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