An Investigation into Cash Flow Forecasts Practices

Cash flow forecasts are the most important step in the capital budgeting process in terms of planning effectively to finance for cash deficit and invest cash surplus for capital expenditure decisions. Despite its importance, little progress has been made in its estimation process, due to the difficulty of producing accurate cash flow numbers for the analysis of capital budgeting decisions. This management project details the investigation of the cash flow forecasts practices and highlights some of the challenges in such forecasts. The cash flow forecasts practices have been investigated in an exploratory and explanatory study that has captured qualitative data about the considerations of the practices to improve the level of estimation accuracy. A total of 4 respondents from financial institution, with different levels of cash flow forecasting experience, participated in the questionnaire study. The results indicate that other than considering the relevant cash flow information into cash flow forecasts, there are other factors to be considered to experience a higher level of accuracy in such forecasts. The accuracy improves when the financial institution generates detailed cash flow forecasts for relatively smaller capital expenditures. In the case of more complex capital expenditure proposals, the financial institution used a range of estimates to evaluate different possible cash flows pictures when making capital expenditure decisions. Furthermore, multiple forecasting methods, both quantitative and qualitative forecasting methods are used to incorporate risks and uncertainty in forecasting capital expenditure cash flows. Finally, there are different perceived importance factors, such as financial, marketing and production in the estimation process of cash flow forecasts. These results suggest that the cash flow forecasting process or practices are very important in generating accurate cash flow forecasts. It is believed that this investigation and other similar studies will help provide the basis to achieve a higher level of accuracy in generating cash flow forecasts