Forecasting Expected Cash Flows
Overview
Mathematical Treatment
Cash balances are modeled as a random function of time.
{% Cash = c(t) %}
Balances at time {% t %} are then forecasted as an
expected value
{% forecast = \mathbb{E}[c(t)] %}
Due to the linearity of the expectation, one can forecast each line item separately and then just
add.
{% \mathbb{E}[c(t)] = Current \, Cash + \mathbb{E}[Sales_t] + \mathbb{E}[Cash \, From \, Receivables] + ... %}
Forecasting Variance
When the items that contribute to the working capital are independent, one can use the
Variance of a
sum formula to calculate the variance, and then the standard deviation of forecast.
{% Var(\sum X_i) = \sum Var(X_i) %}
