Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data

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Introduction

I have chosen to deal with forecasting cash flows as a separate section because it represents a different universe of risk for those engaged in the process, when compared to the task of analysing historic cash flows. What follows is a discussion of the major points of difference between the analysis of historic cash flows (and data in general) and the process of forecasting cash flows (and forecasting in general).

FORECASTING VERSUS ANALYSING HISTORIC DATA

In examining historic cash flows we are essentially conducting our analysis exercise after the fact. We are seeking to make published and other historic data more useful and accessible by manipulating and simplifying it. This is similar to the process carried out by a detective in seeking to solve a crime. The facts (clues) are there, it is a matter of identifying them and piecing them together to tell the full story of what actually happened.

In most situations we will make an assumption that the published cash flow data that represents the starting point for our analysis is fact. Occasionally, due to accounting manipulation and abuse, fraud or misrepresentation, this assumption will turn out to be wrong, so invalidating our analysis of what actually happened. From this initial insight we can immediately attempt a maxim.

All assumptions are dangerous.

For example, if you have developed a comprehensive historical cash flow analysis of a business from published audited accounts, perhaps because your organisation ...