The Role of Cash Flow Forecasting In Capital Budgeting Decisions: Evidence from Libya

Ntim C and Alsharif AA

Published on: 2026-03-07

Abstract

This study highlights the relationship between the cash flow forecasting process and capital budgeting techniques, where the forecasting process initially identifying the procedures & methods used in forecasting, and ends by estimating the cash flows required by managers for investment decision making. In addition, this study utilized questionnaire survey to collect data from (69) manufacturing companies operating in Libya.

The researchers found that most manufacturing companies depend on personal and management's subjective estimates in forecasting their future cash flows. In terms of the use of capital budgeting techniques, the research findings emphasize that most Libyan manufacturing company’s use the payback period (PB) and accounting rate of return (ARR) to evaluate and select the investment opportunities. Besides, most Libyan manufacturing companies used subjective assessment as a risk appraisal technique.

Consequently, 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 firms, the research findings are as follows: First, the forecasting procedures/methods and the components of cash flow are positively associated with the use of capital budgeting techniques. Second, the indirect relationship between the cash flow forecasting methods/procedures and selecting the capital budgeting techniques is mediated by the components of cash flow.

Keywords

Cash flow forecasting process; Capital budgeting techniques

Introduction

Capital budgeting is one of the important developments in budgeting. Not only the capital budgeting is used in the planning and control of investment expenditure, but also it plays an essential role in the optimal allocation of resources among the specific alternatives. Consequently, the responsibility for making the capital budgeting decision is one of the responsibilities of the top management, where the management accountant provides the managers with valuable information for planning and control of investment expenditures. In fact, the philosophy of CB depends on the modern concept of management accounting where the administrative functions of both accounting and management complement each other and each is consequently a tool to achieve organizational goals [1].

However, the allocation of limited resources to different investments has become a pertinent consideration after the Second World War with global reconstruction efforts. The modus operandi that emerged for the planning and control of investment expenditures was a capital budgeting (CB), which generally refers to the investment decisions in finance literature [2]. Capital budgeting decisions include current capital outlays and future cash flows generated by the investment project [3]. Capital budgeting decisions are extremely important to corporate management as they fundamentally determine firms’ future growth and prospects; naturally, more effective investment decisions can be made with improved forecast accuracy of cash flows and the evaluation of investment alternatives.

For the full-length article, please go through this link: https://www.pubtexto.com/pdf/?the-role-of-cash-flow-forecasting-in-capital-budgeting-decisions-evidence-from-libya