TECHNICAL NOTE Cash Flow and the Consistency Principle in Working Capital Management Calculations

By Hakim Lyngstadaas and Terje Berg.

The consistency principle when estimating cash flows states that the net present value of the discounted cash flow should be the same, even when using different estimation methods and techniques.

However, the estimation is not straightforward when estimating nominal and real net change in working capital. A case experiment with 62 students was conducted, the results suggesting that they struggle with the consistency principle when estimating net changes in working capital as part of cash flow analysis.

This technical note proposes solutions to this challenge. The value from this technical note is to ensure correct estimation in net working capital cash flow changes, which contributes to providing an adequate level of liquidity, and gives a sound judgement in business project analysis and estimation of a firm’s value.

JAMAR 14.2-Technical Note-WCM & Consistency Principle

 

About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.