Cash Requirements Research Articles

To sell or not to sell?A Pastoralist's Dilemma: A lesson from the slaughterhouse

Marketing strategies employed by herders in Piura, a coastal region in northern Peru, are discussed in conjunction with ecological and economic factors. Data from regional slaughterhouses help in analyzing decisions concerning livestock offtakes and in understanding the rationale behind them. Piura is characterized by sharp weather changes, amplified by the El Nino phenomenon. The variations in precipitation and forage availability strongly affect production, structure, and dynamics of the herds and are therefore a significant component in determining the actual marketing decision strategy. “Pure” herders adopt an “insurance” strategy emphasizing a build-up of herds during abundant years in order to compensate for considerable losses caused by frequent droughts. The use of stubble and concentrated feed in coping with droughts is restricted by economic and social factors. Agropastoralists are affected not only by ecological factors but also by labor availability, agricultural cash requirements, and household needs. As a result, these goat keepers practice a “capital-manipulation strategy” in which goats and kids are used as a form of capital. The paper provides an empirical representation of these two marketing strategies based on slaughterhouses' records and a complementary field survey.

Corporate Takeovers and Petroleum-Industry Restructuring

Summary A controversy over the merits and methods of corporate takeovers has developed recently in the petroleum industry. The successful takeover or merger depends on the efficient use of available financing and careful management of employees. The difficulty in assessing the value of a corporation and the undervaluation of oil-industry stock has enticed speculative buyers (raiders) into takeover attempts. The current tax code encourages takeovers while government legislation proposals attempt to eliminate wasteful ones. Defensive tactics used by corporate managements to discourage raiders raise questions about shareholder and employee rights. Leveraged buyouts have encouraged takeover activity because cash is obtained easily through investor groups. Eight approaches to financing have been used consistently by industry. Six of these financing methods use cash that is raised from debt securities or loans. Financial direction in the oil industry is toward cost cutting, profitability, and wise investing. Finding oil is important, but a company must also remain competitive and increase its assets to survive. A review of oil companies affected by the current merger activity indicates that those companies entering into merger agreements in the last 2 years have experienced asset gains, but they also have suffered revenue, income, budget, and stockholder equity losses. Introduction Since 1983, 50 domestic oil companies have expanded or disappeared because of mergers. Dwindling oil reserve bases result in undervaluation of oil firms because their value is based on their reserves. This is the prime reason speculative buyers, or corporate raiders, engage in takeover attempts. Falling crude prices, slack demand, and deflation have caused unprecedented financial and structural reordering. To remain competitive, these companies are selling unprofitable downstream assets and unloading nonoil subsidiaries in an effort to lower costs and streamline operations. The number of these takeovers has created a controversy over economic and social effects. The takeover pros and cons can be categorized into four major concerns:how takeovers influence the economy;how they affect shareholders' rights;how they affect employees; andhow they determine the future supply of domestic oil. The federal government is attempting to deal with all four concerns by enacting legislation to control takeovers. Corporate managements use short-term defensive tactics to thwart hostile takeover attempts. The tactics are controversial because of their dubious benefits, high costs, and erosion of stockholders' rights. The methods only serve as diversions to a determined raider. Leveraged buyouts can occur internally by management or externally by outside investors. The leveraged buyout allows the purchasers to use the purchased company's assets as collateral to reduce huge upfront cash requirements, thus making the takeover easier to finance. The takeover threat and falling crude prices have caused U.S. oil companies to restructure and create more efficient upstream operations. If crude prices decline further, industry restructuring will increase as long as bankers continue to lend and the government does not interfere. Merger Management Merger management basics are aligned with those presented for corporate management by Peters and Waterman.1 The merger manager (see Appendix for definitions of terms) should consider carefully the following basic principles.Have a bias for action.Stay close to the customer.Stick to the knitting.Be productive through people.Get hands-on experience and be value-driven.Stay with a simple form and a lean staff. Our objective is not to subordinate the remaining management criteria or autonomy and loose-tight properties, but we feel that these principles are important and are controlled by corporate pressure rather than by individual management functions. During a merger, a manager must carefully enforce Principles 1, 2, and 4 in regard to the purchased corporation. In addition, Meister2 recommends that these few basic principles are needed for a successful merger that will minimize turmoil and enhance employee morale:let employees know where they stand;adopt procedures to manage employee and program integration; andmotivate acquired company managers for merger success. These views reinforce Principles 2 and 4 listed earlier1 as the most important merger management functions.

Currency substitution and the precautionary demand for money

Although the implications of currency substitution have received considerable attention recently, the microeconomic foundations of this phenomenon seem largely to have been taken for granted. The present paper considers the precautionary motive for holding cash balances as one possible motivation for the currency substitution hypothesis. A three-asset model is presented in which transaction costs are explicit and an agent is faced with uncertain cash requirements in two different currencies. The role played by the expected rate of depreciation in the optimal portfolio allocation is found to conform with prior beliefs.

Productivity of yam under alternative cropping systems adopted by small-holder farmers of southeastern Nigeria

This study compares productivity of yam under mixed and sole cropping systems and determines the opportunity cost involved in the mixed cropping system preferred by small-holder farmers of southeastern Nigeria. The results show that output of yam per hectare, output/seed input ratio, as well as yield per yam crop stand, were all higher under yam sole cropping than under mixed cropping. Scarce resources of land, labour and capital were more productive under sole cropping. The opportunity cost of producing yam under a mixed corrping system was equivalent to ▪480·79 per hectare. Considering the labour and financial problems faced by the farmers, and given that the same level of social status is attainable by adopting either of the two cropping systems, it becomes rational to adopt sole cropping with less labour and cash requirements but higher output and returns.

The World Oil Market (WOM) Model: An Assessment of the Crude Oil Market Through 2000

The great demand for oil price forecasts has resulted in extensive discussion of possible behavioral and structural relationships to describe this jerky market. On the supply side, much attention has been focused on the inner life of OPEC. Is it or not a cartel? Is it a cartel with a competitive fringe? How strong is the tension between high and low absorbers? Are the depletion policies derived from myopic cash requirements or from long-term optimization schemes?

Asymmetric information and a theory of compensating balances

This paper derives an economic justification for the existence of compensating balance requirements using an equilibrium model of asymmetric information. Because bank profitability depends upon the probability distribution of a borrower's future cash requirements, and assuming this distribution is known by the borrower but not by the bank, compensating balance requirements can be used by the bank as a screen to distinguish among borrowers. Compensating balances are shown to exist without invoking assumptions of monopoly banks or non-maximizing behavior, and these balances need not be explained as a method of indirect payment for bank services.

Multiproject scheduling: Analysis of scheduling strategies under unequal delay penalties

AbstractThe multiproject scheduling problem is investigated under the assumption that delays corresponding to different projects carry different penalties. Five penalty functions are introduced that simulate typical business behavior. These are: 1) assigning the highest penalty to the project requiring the greatest amount of resources; 2) assigning the highest priority to the longest project; 3) assigning the highest priority to the project requiring the least amount of resources; 4) assigning the highest priority to the shortest project; and 5) random assignment. Justification for each case is provided.Two powerful project summary measures were used to generate the test problems. The first measure, average resource load factor (ARLF), identifies whether the location of the peak requirement of all (i.e., combined) resources is in the first or second half of the project's critical path. If each resource is expressed in terms of dollars, then ARLF identifies the location of the peak cash requirement. Since in practice the choice of the scheduling strategy is influenced by the location of the peak cash requirement, performance of the scheduling strategies is analyzed with respect to values of this measure. The second measure, average utilization factor (AUF), calculates the ratio of resource requirements to availabilities. It is shown that problems tested must have different AUF values in order to be classified different for purposes of experimental design. Thus a factorial model of the form, y = Strategy + Penalty + ARLF + AUF + ϵ was used to generate 385 problems, each requiring 2 to 4 resources, containing 3 to 5 projects and 34 to 63 activities.The computer program used in the study is based on a parallel method of scheduling in which priorities of the activities are determined when the activity is considered for scheduling. Ten scheduling strategies are tested. Some important ones are: 1) to schedule the shortest activity first; 2) to schedule the activity with minimum slack first; 3) to schedule the activity with maximum work content first (i.e., from the project with highest work content); 4) to schedule the shortest activity from the shortest project first; and 5) to schedule the activity with maximum penalty first. Shortest activity first and minimum slack first are popular strategies introduced by other researchers.Using number of times ranked first as our criterion, scheduling the activity with maximum penalty first provides the best results followed by the strategy of scheduling the activity with maximum work content. But when these results are analyzed with respect to existence of a very expensive project (i.e., dominance) in the problem, performance of the maximum penalty strategy improves. When the overall results are analyzed with respect to values of ARLF, a different picture emerges. Then the strategy of scheduling the activity with the highest penalty first provides the best results if the peak requirement is early. When the peak requirement is toward the middle of a project's unconstrained critical path, scheduling the activity with the highest work content provides the best results. When the peak requirement is late in a project's life, scheduling the shortest activity from the shortest project is the best strategy to adopt. These findings were tested for statistical significance by using nonparametric testing procedures and were found to be significant.

Another Look at Liquidity Preference

This paper shows that a precautionary demand for money can be derived in models of the state of nature variety with uncertain cash requirements even if sales of assets incur no real costs and investors are risk-neutral. The randomness of asset prices results from uncertainty about the future state of the world that determines cash requirements, hence particular market responses and ultimately equilibrium prices. Positive correlation between the amount of assets to be liquidated and the liquidation price is a sufficient condition for the derivation of an interest-elastic demand for liquidity. The correlation coefficient is a measure of illiquidity of a perfectly marketable asset. Interesting comparative static results are also derived.

Abstract: Short-Term Financial Planning under Uncertainty

The essence of short-term financial planning is to determine an asset and liability mix that minimizes the cost of financing the firm's cash surpluses and deficits over the planning horizon. Seasonal and other effects cause uncertainty in forecasted cash requirements, liquidation, and termination costs. We develop a stochastic linear programming model that is computationally feasible for a firm's financial planning over several periods with all three types of uncertainty when there is a rich structure over the set of possible asset choices. The models' solution is facilitated using a recent novel algorithm for finitely distributed simple recourse SLPR problems developed by Wets and coded by Collins, Kallberg and Kusy. The algorithm uses a “working basis” that has the same dimension as the corresponding (approximate) “mean” linear program.

A Decision Analysis Approach to Cash Flow Management

We propose a method of applying the Hespos and Strassmann stochastic decision framework, originally intended for investment decisions, to cash flow management. Sequences of uncertain events, such as a strike, affecting forecast cash flows are represented by a probability tree. Forecasts of constituent cash flows such as sales and costs are represented by Beta distributions dependent on paths through the tree. Monte Carlo simulations sample these distributions, and equations provided in the model convert the sampled cash flows to cash balances in each period. Frequencies of cash balances weighted by probabilities along paths through the tree yield a combined relative frequency distribution of cash balances for each period. These and related results may be used by management to plan financing arrangements to meet cash requirements in the future.

Determination of an Optimal Revolving Credit Agreement

Most large companies develop formal or informal agreements with banks to cover anticipated seasonal or temporary cash needs and/or to provide assurance of the availability of funds against unanticipated cash requirements. We address the problem of determining the optimal limits of available funds a company should maintain under a revolving credit agreement. Typically a company will negotiate a legal commitment with a bank or group of banks for a specified period of time, usually one to three years, in which the bank agrees to extend credit up to a specified maximum amount. During the duration of the commitment, the bank must lend money to the company whenever the company wishes to borrow, provided the amount of money borrowed does not exceed the maximum amount noted in the agreement. The company must not be in default of any of the restrictive covenants of the agreement, such as working capital limits, compensating balances, limits on other indebtedness, etc. Although the agreement itself provides for intermediate-term financing, the agreement often takes the form of short-term (30-60-90 days) renewable notes.

Financial planning in a divisionalized firm

In a business environment characterized by rapid technological changes, massive capital outlays, intensive competition, and the administration of complex large scale organizations, future growth and profitability will largely hinge upon reliable and intelligent long range financial planning. If a business organization is to raise funds at the most reasonable costs and terms in money markets and capital markets, it must plan its cash requirements in advance to have ample time to negotiate effectively with the prospective lenders or their representatives. It is here that long range financial planning makes important contributions to effective financial management.

Corporate Models - A New Tool for Planning

This paper discusses the role of corporate models in the planning of the growth and operation of electric utilities. This new tool is a major addition to the methods available to the engineer, financial analyst and business manager to use in the investigation of alternate courses of action for strategic planning, tactical planning and situations involving operational planning and control problems. These models include consideration of the forecasts of the expected company growth in terms of requirements for new service, load growth in existing customer groups, requirements for system expansion, operating expenses and revenues, and the resultant interval cash flows and requirements for new external funds. These models produce forecasts of financial reports, requirements for external financing and any specialized reports desired. They include a representation of the accounting system as well as the business and production sectors. This paper illustrates how these models may be used to supplement, not supplant, the usual engineering economy study and compares results produced by model studies and a revenue requirements analysis. In addition, a discussion is given of areas, such as lease financing, which are difficult to handle with the usual engineering economy approach but which model can accommodate. Finally, the paper offers suggestions concerning the steps required to develop and use corporate models within the electric utility.

Budgeting Costs and Returns for Indian River Citrus Production, 2003-04

Budget analysis provides the basis for many grower decisions. Budget analysis can be used to calculate potential profits from an operation, to determine cash requirements for an operation, or to determine break-even prices. This report presents a budget constructed from current data and serves as a format for growers to analyze costs and returns from their individual records. Estimated costs and returns of growing seedless grapefruit in the Indian River area of Florida are presented for the twentieth year. The format presented may be used by individual growers to budget costs and returns, utilizing individual data on specific groves. September 2004.

Simulating a Cash Budget

Simulation as an analytical tool can be of great value to a financial manager seeking to estimate his future cash requirements. In this study, the cash needs of a hypothetical firm are studied, and one technique of simulation is described.

Financial forecasting for corporate planning

Planning to meet cash requirements is an essential management function in any business. It is not enough for the undertaking to make a profit. Cash resources must be planned to finance a negative cash flow in a period when necessary additions to fixed assets or temporary increases in working capital requirements are in excess of funds being generated by profits and by depreciation charges. In a period of surplus funds, the need for a forecast of future cash levels is no less important. A forecast of available funds is a prerequisite for any investment plan. The author discusses in detail the use of forecast balance sheets and source and application of funds statements. He also develops a cash flow model and examines the use of the computer for simulating the financial consequences of alternative policies.

Optimal Short Term Financing Decision

The cash requirements of many firms follow a seasonal pattern. These firms may obtain short term cash to cover their seasonal needs from a variety of sources: e.g., lines of credit, delaying of accounts payable, term loans, pledging or factoring receivables, etc. Each of these alternative sources of cash may have different costs as well as special restrictions. Given the set of cash requirements and the costs and constraints relating to alternative sources of cash, it is often difficult to determine the optimum manner of meeting the short-term cash needs. In this paper, this short-term financing problem under certainty is formulated as a mathematical model and solved through the use of a general linear programming routine. Optimum solutions are determined for a number of cases and the general form of the solution is discussed. The paper includes an analysis based on marginal costs and a discussion of the short-term financing problem under uncertainty.

Energy in 2059: ABSTRACT

Population increase and an acceleration in per capita demand for energy will produce a total demand for energy in the year 2059 of 40 to 50 times that of 1959. Thus, demand for energy will a little more than double every 20 years. Much of this energy in 2059 will be End_Page 130------------------------------ coming from the same sources it is coming from today. Shortly after the turn of the 21st Century, various presently undeveloped sources of energy will have begun to supply an increasing portion of total energy demand, which will, by then, be seven or more times that of today. These new sources of energy will be both organic and inorganic. The first will include shale oil and coal-derived petroleum. The inorganic will include nuclear, solar, geothermal, tidal, and other sources of energy. These new sources will supply perhaps over half of world energy demands by the year 2059. Eventually the petroleum industry will become, in large degree, a chemical industry. It will provide the raw materials and fashion the building blocks for hundreds of products useful to man. The petroleum industry will need to accelerate its research to keep abreast of intra- and inter-industry competition. In few other industries are the rewards to be anticipated as great as they are in that of petroleum. Industry will, as in the past, have to meet many difficult problems. One of the most difficult for management in the future will be to find the cash requirements. In this respect the problems of the present are modest indeed. Availability of capital will depend, more than ever, on a satisfactory return on investment. End_of_Article - Last_Page 131------------

Report on Distribution Panel

termined from the open discussion by the participants in describing practices within their companies that progressive budgeting of cash requirements is widely employed. Divergencies were indicated with respect to borrowing policy but considerable uniformity existed with respect to the handling of idle cash. The session devoted to the second topic followed the pattern of the first session. Aggregative data was provided through a discussion of the McGraw-Hill survey of capital investment intentions. This was followed again by open discussion by the participants of the methods employed and problems encountered by their respective companies in formulating capital budgets. The use of long-range budgeting techniques and continuous review of long-term budgets was a point of agreement. In most instances justification for major capital expenditure projects was measured by expected rate of return on investment. The serious implications of such projects emphasized the need for careful collection and use of statistical data. The final session employed a direct company approach to the problems of developing budgetary cost control standards, analysis of variances and results, and the problems associated with the presentation of cost statistics to management. In this session more attention was directed to the use of such specific statistical tools as sampling. The economies and accuracies obtained from the use of the sampling technique were clearly described by several participants. In addition, the graphic presentation of operating results came in for considerable discussion. It was agreed that budgeting of any kind requires cooperation and coordination of the individuals and departments involved. Throughout the three sessions the concept of business statistics employed was a broad one. In other words, attention was not directed primarily at specific statistical techniques but rather toward the collectionl and use of both internal and external data necessary for financial planning and control. The enthusiastic exchange of methods and observations by the participants was the main contribution to whatever success the panel enjoyed.

Financial Administration of the Government of Canada

The Dominion Government is by long odds the most complicated, and in most respects the largest, administrative enterprise in this country. Its activities cover a wider scope and show a greater variety than those of any other Canadian business or organization. Its employees, including regular and fluctuating staffs, number about 65,000 persons, of whom 53,000 are scattered throughout the country in various centres outside the seat of government. Its pay-roll exceeds $77,000,000 annually. Its annual revenue now aggregates over half a billion dollars and its total cash turnover amounts to over one and a half billion dollars. Unfortunately in these hard years its expenditures may exceed the first-named figure of revenue receipts by a comfortable—or rather uncomfortable—margin. In collecting these revenues and making these expenditures it receives and deposits some 675,000 bank drafts for a total of $700,000,000; issues three and a half to four million cheques each year, totalling around one and a half billion dollars; pays $45,000,000 in pensions direct to 95,000 individual pensioners; and redeems 4,300,000 interest coupons. On the average, each working day it sells 70,000 money orders and postal notes. It buys, refines, and sells in the world's markets practically all the new output of our gold mines and this, as well as other factors, necessitates important operations in foreign exchange. Its financing activities constitute the most important factor in the investment markets. During the last five years it has floated for new cash requirements and for refunding purposes, in Canada, London, and New York, securities aggregating over two and a quarter billion dollars—not including guaranteed Canadian National Railways obligations which would add another $235,000,000 to the total, or Dominion Treasury bills which are sold in the amount of 25 or 30 million dollars every fortnight to redeem maturing issues of a similar amount.