RELATIVE POWER OF ACCOUNTING PROFITS AND CASH FLOW OF OPERATIONS TO FORECAST FUTURE CASH FLOWS: AN EMPIRIC STUDY IN BRAZIL

Abstract

This article assesses the efficacy of future flow forecast of four performance measurements of the company for one and two years ahead, of which two are cash flow and two are profits as of the ex-post measurements of Operations Cash Flow (OCF) taken in an isolated manner, and as a whole with a variation of short term accruals (AcBcpB) and of accounting Net Profit (NP). The forecast methodology is of the external type regarding the sample. Several transversal annual and biannual forecasts are made for the 92 companies that comprise the sample from 1996 through 2004. The absolute average forecast (errors) deviations, the Median of errors and average correlations among real and projected values of variables are investigated and compared among them so as to verify the efficacy of future flow forecast of each of the three models. The results revealed that: (1) the NP is higher than the OCF to forecast the Net Profit of the following year, but contrariwise, the OCF is higher than the NP to forecast the Net Income of two years ahead; (2) the combination of short term accruals (AcBcpB) with the OCF does not improve forecasts made only with the OCF, thus indicating the Operations Cash Flow is more efficient to forecast future cash flows and of income than net working capital; and (3) the Operating Profit (OP) is difficult to forecast, as defined in Brazilian corporate legislation.