Closely connected to the operational activity model is the cash funding model, which calculates cash requirements based on future revenues and expenses. This chapter explains how to create this model, with examples based on the XYZ, Inc. case study.


The purpose of the cash funding model (CFM) is to assess the organisation’s need for financial resources. Some of those resources will be used to support operating expenses, and others will be required for capital investment or strategic initiatives. This model is intrinsically linked to the operational activity model (OAM) and detailed forecasting model (DFM) in order to predict future cash flows. This can help management to assess the best source for any cash shortfalls.

Although it is true that most internal financial systems can hold data relating to the actual flow of cash, what they do not allow is for management to ‘play around’ with the data from a planning point of view (for example, to see a revised cash flow based on new supplier credit terms or a change to customer payment profiles, to consider the cost of funding an increase in production capacity to meet the projected demand for new products, or to assess the impact on resources by outsourcing a particular function).

Similarly, financial systems do not hold the key assumptions that affect cash flow. For instance, inflation has a major impact on cash resources, yet the underlying data supporting any inflation assumptions is not contained ...

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