The impact of cash flow forecasting errors on the accuracy of business value estimation

Abstract

Aim. To assess the impact of cash flow forecasting errors on the accuracy of business value estimation and to develop a methodology for applying the income approach to business valuation, aimed at reducing these errors and improving the accuracy of business valuation.Objectives. To systematize external and internal factors of cash flows of enterprises of the real sector of economy; to give a qualitative assessment of the impact of large-scale hard-to-predict negative events — the so-called black swans — on cash flows, business value and to determine the requirements to the qualities of a modern manager necessary for effective work in conditions of non-stationary impact of hard-to-predict large-scale external risks; to assess the impact of errors in cash flow forecasting of the post-forecast period on the result of business valuationMethods. On the basis of the system approach the author applied quantitative methods of time factor accounting in financial management, methods of situational, comparative, factor and regression analysis, as well as approaches and methods of financial risk management.Results. According to the results of the research the external and internal factors of cash flows of the enterprises of the real sector of economy were systematized, the most significant factors of deviation of expected and actual cash flows were singled out. A qualitative assessment of the influence of “black swans” on cash flows and business value is given, the requirements for the qualities of a modern manager necessary for effective work in conditions of non-stationary impact of hard-to-predict large-scale external risks are determined. In addition, analytical estimates of the impact of cash flow forecasting errors on the results of applying the methods of income approach to business value assessment are obtained. The methodology of business value estimation, oriented on the increase of estimation accuracy on the basis of taking into account the stages of business life cycle, is offered.Conclusions. The quantitative estimates obtained in the article and the developed recommendations serve as a theoretical and methodological basis for increasing the efficiency of the income approach to business value assessment in conditions of increased uncertainty and market volatility.