Operating Cash Flow Prediction: A Comparative Study of Earnings and Accruals

Purpose: Accurate cash flow prediction is crucial for effective financial management in companies, facilitating informed strategic decisions related to investment, financing, and working capital management. This study investigates the comparative effectiveness of historical income-based and accrual-based models in predicting short-term cash flows. Method: Using data from Bloomberg Terminal on 155 manufacturing companies listed on the Indonesia Stock Exchange (IDX) between 2011 and 2021, regression analysis was employed to examine the predictive power of both models, with cash flow as the dependent variable and historical income or accruals as the independent variable. Findings: The findings reveal that the historical income-based model, with an R² value of 0.6809, significantly outperforms the accrual-based model in predicting short-term cash flows. This study suggests that historical income data provides more relevant and reliable information for forecasting future cash flows. Novelty: The study uniquely contributes by comparing the predictive effectiveness of historical income-based and accrual-based models, specifically in the Indonesian manufacturing sector, an area underexplored in current literature..