Question

How do cash forecasting and short-term borrowing strategies relate?

Answer 1

Cash forecasting involves assessing the cash flows of the business, both long term and short term. It involves preparing the cash budget or cash flow statement, summarizing all the cash inflows and outflows of a particular period, to arrive at the excess or shortage of cash the company would face. Short term borrowings come into picture when the company has liquidity crunch in one period but is expecting cash flows in some future period. In such cases, the company can borrow in the form of short term borrowings and repay such borrowings when the cash inflows are generated.

Basically short term borrowings depend on the cash position or forecasting. In case of cash crunch the company makes short term borrowings and in case of surplus cash, short term borrowings are repaid. Both, cash surplus or shortage can be known through cash forecasting.