Simulating a Cash Budget

by Eugene Lerner



The use of simulation as an analytical tool can be of great value to a financial manager seeking to estimate his future cash requirements. For with this tool, he can develop an informed judgment of not only the average amount of funds he is likely to need each period, but also of the buffer stock of cash that he will need to protect his company from adverse random cash outflows. Simulation also enables the financial manager to experiment with different financial policies in a quick and efficient manner. As a consequence, different alternatives can be evaluated in terms of their impact upon cash balances much more effectively than has heretofore been possible. Finally, simulation can help the financial manager determine the value of information. Specifically, he can see how results would be changed if better data were available for specific inputs to the cash budget. If the results are only marginally improved and the data are expensive to collect, the financial manager can adopt a different course of action than if the improved data results in marked changes in his cash budget.

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