Four Out of Five Companies Can’t Forecast Cash Flow, Finds Study

Four out of five of the world’s largest companies are unable to accurately forecast mid-term cash flow, according to a new study from The Hackett Group, its REL working capital division, and the National Association of Corporate Treasurers (NACT).

The study found that only 22% of companies say they can forecast mid-term (2-3 months out) operating cash flow to within 5% accuracy. Previous Hackett research also showed that only one in three companies can forecast earnings to within 5% accuracy, and less than half can make the same claim about sales forecasting.

Top performers do significantly better than their peers. A total of 74% are able to forecast mid-term cash within 5% accuracy. These top performers also complete their forecasts in less than half the time it takes typical companies, and require fewer staff to complete the process.

Several findings from the study looked at how companies must improve organisational collaboration and alignment and the underlying technologies that support cash forecasting. Specifically, about 70% of all companies surveyed rely almost exclusively on standalone spreadsheets as their primary cash forecasting tool, with few turning to best-of-breed applications or enterprise resource planning (ERP)-related systems. The best companies also have cross-functional teams with significant operational involvement, which is critical given the number of groups outside of finance that have a role in the forecasting process.

A related Hackett survey also found that while forecast accuracy is measured by most companies, 80% don’t set accuracy targets and 85% don’t have any form of incentives in place to promote improved forecasting accuracy.

REL president Mark Tennant said: “The bottom line is simple – you can miss the mark on sales or earnings forecasts occasionally and survive. But you can only run out of cash once. This study clearly details the practices and procedures that companies can use to avoid a calamity and get a handle on this key area. Companies would be well advised to consider whether they’re leaders or laggards here, and how they can make changes to improve cash forecasting accuracy.”

The study is based on responses from 85 US and European companies with average revenue of over US$12bn.


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