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

This study highlights the role of cash flow forecasting process in capital budgeting decisions, where the forecasting process starts with identifying the procedures and methods used in forecasting, and ends by estimating future cash flow required by managers for decision-making. This study utilised questionnaire survey to collect data from 69 manufacturing and oil companies operating in Libya within contingency and new institutional sociology theories, which are commonly used in capital budgeting research. Further, this study seeks to ascertain the key variables associated with the forecasting process in capital budgeting decisions. In this regard, this study examined the contingent and institutional variables influencing the use of forecasting procedures and methods associated with the adoption of different capital budgeting processes.

Consequently, the results of this study explored the forecasting procedures, methods and the capital budgeting techniques used in manufacturing and oil companies operating in Libya. The researcher found that most manufacturing and oil companies depend on personal and management's subjective estimates in forecasting their future cash flows. In terms of the extent of use of capital budgeting techniques, the findings indicate that most Libyan manufacturing and oil companies use the payback period (PB) and accounting rate of return (ARR) to evaluate and select the investment opportunities, as well as rely upon subjective assessments in evaluating the project risk inherent within capital budgeting decisions.

In addition, this study applied the partial least squares structural equation modelling (PLS-SEM) technique to test the research hypotheses. Using the same sample of Libyan manufacturing and oil companies, the findings are as follows. First, the use of forecasting procedures/methods and components of cash flow are positively associated with the extent of use of capital budgeting techniques. Second, the forecasting horizon and the use of multiple data sources in forecasting are significantly associated with the use of forecasting procedures and methods. Third, the presence of qualified persons responsible for estimating future cash flow is positively associated with the use of forecasting procedures and methods. Fourth, the findings suggest that the influence of contingent variables differs from public to private companies. Fifth, the study findings also suggest that coercive, mimetic and normative pressures are significantly associated with the use of forecasting procedures and methods. Finally, the research findings revealed that there is a significant relationship between the procedures and methods used in forecasting (PMUF) and the firms’ financial performance (PERF), whilst the study does not find any evidence that the extent of use of capital budgeting techniques improves the firms’ financial performance. The findings of this study offer new important insights and contributions to the existing literature, as well as have useful implications for practitioners and researchers.