Cash Flow Forecasting Process and its Impact on Capital Budgeting: Evidence from Libya

This paper highlights the role of cash flow forecasting process in capital budgeting decisions. To achieve this goal, we examine the role of forecasting procedures and methods in estimating future cash flow related to capital budgeting decision, as well to test the influence of contingent and institutional variables on the use of forecasting procedures and methods. Further, this study seeks to ascertain the key factors associated with the forecasting process, which are data sources, forecasting horizon, qualification and position of forecaster. Most manufacturing and oil companies operating in Libya depend on the personal estimates for forecasting future cash flow, as well as use the payback period and accounting rate of return to evaluate the investment projects. Statistically, the findings of this research provided robust evidence that the use of forecasting procedures and methods is significantly associated with the extent of use of capital budgeting techniques. Subsequently, the forecasting horizon and the use of multiple data sources in forecasting are significantly associated with the use of forecasting procedures and methods. Moreover, the results of this study emphasized that the contingency variables have a direct and significant impact on the use of forecasting procedures and methods. In this regard, we found that the influence of the combined contingent variables differs from public to private sector based on PLS multi-group analysis (PLS-MGA), whereas the PLS-MGA was exposed opposite result in terms of manufacturing and oil companies. Moreover, the research findings revealed that there is a significant relationship between the use of forecasting procedures and methods and the financial performance of firms*. Even though, the relationship between the extent of use of CBT and the FPFs is not statistically supported