The Secrets of Cash Demand Forecasting
The Secrets of Cash Demand Forecasting
by Gary Faulkner So perhaps you are under the impression that the physical currency that comes from a bank or an ATM grows on trees? As the old adage goes, this is (obviously) not the case. It may be an issue to which the person on the street has never given much thought. It may seem that we are simply flooded with cash that is readily available whenever needed (which would be a dream scenario for petty thieves, no?) However, for an institution with a business model that requires it to have cash on hand and be ready to supply at a moment’s notice, this familiar practice introduces a very interesting supply chain problem. It is not something that has been trivially solved and there are a variety of techniques used for forecasting cash demand. Not to get too deep into the techie details, but the demand for cash flow is typically performed by variants of time series forecasting – using time-plotted values and a statistically meaningful model to predict future values. These take many different specialized statistical forms, e.g. vector time series, autoregressive integrated moving average (ARIMA), and many others with some very unwieldy names and lots of neat equations. Another approach is to apply artificial neural networks. Since they are an (admittedly simplistic) approximation of the neural networks of th e brain, which is the best pattern recognition device of which we know, they can also be trained with various models to recognize and forecast the complex patterns of cash flow. At Morphis we have shown ourselves to be very inventive and have developed MorphisIMF (no, we are not an alternative to the International Monetary Fund; it stands for Intuitive Monetary Forecasting). Our innovation is that we’ve recognized that there is no one true right solution to this problem for every institution. Therefore, our system uses all available data and transaction history to choose the best algorithm to accurately estimate the correct forecast for all denominations of cash that you will need. Quite clever, yes?
