Cash Flow Estimation Biases

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Table of Contents

Introduction
Analysis
References

Introduction

Performing a SWOT analysis allows establishing the reasons of effective or ineffective work of the company, a particular action or a strategy. Any segmentation starts from a thorough analysis of the market conditions in which the company is working, and an evaluation of the possibilities and the threats that the company might face. In that sense, SWOT analysis serves as a starting point for such assessment. In this paper, A SWOT analysis will be performed on a particular approach in intentionally biasing cash flow estimates, as the estimation of the cash flow can be considered as the most important step in the capital expenditure evaluation process.

Analysis

Strengths

Less pressured to meet performance standards
The project is accepted.

Weaknesses

Wrong representation for the investors on the market conditions
Inaccurate information when planning and managing strategies.

Opportunities

Attracting investors
Increase in stock rates of the company.
Securing high performance levels
Creating competitive advantage
Over-achieving the set profit rate.

Threats

The rejection of projects
Focus on areas that are tied to mangers span of control
Overpaying employees’ compensations in regard of the set objectives.
The occurrence of shortages in cash flow.

It can be seen from the analysis that corresponding potential threats to the possible threats gives the company its main strength in ideal scenarios only, underestimating profit, and over estimating costs. In that sense, it can be seen that the company is in need of another scenario. The potential threats in intentional or intentional biases in cash flow cannot be justified in accordance to the potential opportunities and the established weaknesses.

A cash flow bias could tend keeping costs higher than the supplies, when a scenario of maximal profit is implied. Additionally, the risk of assigning competencies to managers in areas that they allocated more controllable resources, might result in imbalance in the company’s resources’’ allocation. In the case of large and complex projects, the biases in cash flow estimates might lead to significant consequences, where in the case of Polaroid which filed for bankruptcy is exemplary.

In that regard, SWOT analysis can be used in combination with cash flow forecast to set the strategy for the company. If the analysis is used to match the company’s goals and possibilities with its opportunities, then initially providing incorrect or biased information can cancel out the long-term planning and managing the company’s strategic directions, not to say that it is unethical. In one case, that the bias can be seen as acceptable is when the investors are over conscious, and thus underestimating the projects profit can be seen as an additional measure of security in planning the company’s resources.

In general, cash flow forecasting is a good way of planning and predicting the pattern of the company’s development as well as setting the efficiency of taking major investments. The usage of SWOT analysis provided in the aforementioned case of bias in cash flow estimation implied that the company should change its strategy.

References

Biases in Cash Flow Estimation (2009). Web.

Cash Flow Forecasting (2009). Web.

How to Perform a SWOT Analysis For Your Business (2009). Web.

Brown, G. (2006). Project Cash Flow versus Accounting Income. Web.

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Cash Flow Estimation Biases

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