Qualitative Factors and Projections of Future Cash Flows - dummies

Qualitative Factors and Projections of Future Cash Flows

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

As much as accountants hate to admit it, some things in life just can’t be measured. Projections of future cash flows, for example, inherently ignore certain factors that can’t be monetized — qualitative factors, such as the following:

  • Better customer loyalty

  • Enhanced safety

  • Stronger employee morale

  • Improved quality

  • Environmental protection and preservation

Ignore these kinds of factors at your peril.

For example, say you’re evaluating a new factory expansion project and arrive at a negative net present value (NPV), causing you to reject the project. But the new expansion would have saved the company from outsourcing jobs overseas, helped employee morale, and improved community relations.

Evaluating such qualitative factors when making decisions requires a measure of personal judgment, which is different for every decision-maker. If employee morale is important to you, you may choose to expand the factory in spite of the negative NPV.

When looking over the numbers for any capital project, think beyond the immediate profit-and-loss scenarios and consider other factors that are likely to indirectly impact the success of your business.