The Use of Exponentially-Smoothed Transition Matrices to Improve Forecasting of Cash Flows from Accounts Receivable
A pioneering application of a Markov chain to forecast account receivable flows (Cyert, Davidson, and Thompson [Cyert, R. M., H. J. Davidson, G. L. Thompson. 1962. Estimation of the allowance for doubtful accounts by Markov chains. Management Sci. (August) 287-303.]) employed an unusual (the oldest balance) method of aging accounts and an assumption that the resulting transition matrix was stable. Forecasting steady state results was the primary focus of the application. The present research uses a commonly found (partial balance) method of aging, an assumption of dynamic changes in the transition matrix, and does not focus on steady state results. A manufacturer's data were analyzed and exponential smoothing was introduced to update the average transition matrix thereby enabling a tracking of changing customer payment behavior. The actual and Markovian estimates of the company's cash collections checked favorably. The paper also discusses how modifications such as the seasonal and trend adjustments introduced by Winters (Winters, P. R. 1960. Forecasting sales by exponentially weighted moving averages. Management Sci. (April) 324-342.) may be incorporated into the model. Extensions to other areas are offered.
Volume (Year): 24 (1978)
Issue (Month): 7 (March)
|Contact details of provider:|| Postal: |
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:24:y:1978:i:7:p:732-739. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.