What would happen if financial projections were based on incorrect data? For example, if your booked accounts receivable is significantly higher than the actual accounts receivable and cash inflows, does your expense budgeting change? Would your cash flow change? How would you handle suppliers or capital budgeting for this time period? What reports or ratios would you consider in monitoring the financial situation?
First of all, let's understand the impact of "booked accounts receivable" being higher than actual and cad inflow. Booked AR would imply that we have actually sold enough goods and/or services resulting in a higher than projected AR, resulting in higher cash flow when collected. From an operational standpoint this is a good news/bad news situation. Good news is we probably have exceeded expectations for sales, and that is always a good thing. Bad news is that it sends a signal that maybe the forecasting is definitely inaccurate and needs improvement (and by extension, our marketing and financial reporting may be in error as a result).
So yes, we would have to re-evaluate our forecasting methods and the resultant supply/demand economic theory as it relates to our products and services. In addition, we would have to insure that there would be enough cash on hand to provide for any gaps between the sale of goods on credit, and the collection for those goods (will we have to borrow money? If so, what ...
When forecasting techniques provide less than accurate information, the ending result can include a decrease in valuing a firm. When this occurs, the firm must adjust its methods and processes in order to provide security of operations to the financial community and to the shareholders. This discussion examines the factos associated with this process and the possible solutions to be considered.