A plan that will minimize or reduce the impact of cashflow estimation biases on effective decision-making?

Expert Solution

Cash Flow Estimation biases are hindrance to the financial or investment planning of the firm/ business organisation.

To curb the cash flow estimation biases one needs to follow certain steps or plan of action:

First: Preplanning - Preplanning of the project for estimation is must. One must be ready with the required information, resources, plan of action & goal determined. Because it will ensure that there are no major hindrances to the estimation process.
Second: Ensuring the data source is legit or viable and uptodate - i.e. if the organisation is into financing a newer project, it needs to get market data & if the data source is not apt or it is old then the estimates no matter how accurate they are, will make no sense.
Third: Accuracy of the data - For any financial/investment decision the company will rely on accounting datasets of its own & the external sources. So it is very important to ensure accuracy beforehand.
Fourth: Peer Reviewing or Cross Checking - Cash Flow Estimates are based on assumptions of the estimator. Thus there is possibility that the estimator has either missed something or has incorporated a wrong assumption. Therefore getting reviews or rechecked from experts will reduce estimation errors.
Fifth: Opinions - Once the estimations are ready, it can be rolled out for opinions from all the members who are associated with the decision. This is important step because, it is known that there can be a behavioural/psychological influence on estimation. Therefore, opinions or discussion on the estimations will be beneficial if the estimations are based on overoptimism or pessimism.

jeff jeffy answered 1 year ago

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A plan that will minimize or reduce the impact of cashflow estimation biases on effective decision-making?

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