Study Shows Companies Terrible at Forecasting Cash Flow

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When the economy tanks, the first thing you hear is “Cash is king.” An old business phrase, to be sure, but one that has decided impact in any industry, including high tech. It doesn’t matter what your revenues are if you don’t have enough money to pay the bills or even to capitalize on business opportunities. And according to a new study from The Hackett Group, a strategic business consultancy, and the National Association of Corporate Treasurers, only about one Global 1000 company in five can forecast cash flows two to three months out within five percent accuracy.

Close may be good enough for government work, but it’s not for corporate finance. The study doesn’t have an enormous number of respondents — it includes 85 US and European companies. But given that the average revenue of them is over $14billion, it’s certainly an interesting group to examine, and one where you might expect better than average attention to financials. According to the study, a full 45 percent of the companies couldn’t even hit a 10 percent accuracy rate.

The problem becomes more significant when you see that cash on hand as a percentage of revenue has declined from 2007 to 2008, as the following graph provided by Hackett shows:

For some giants in tech, this might not be such an issue because they have such substantial amounts of cash that they can likely absorb fluctuations due to inaccuracy. But for a company with smaller reserves in comparison to revenue could find itself unexpectedly without the available funds expected.

A Hackett study last year found that two-thirds of corporations were unable to forecast their earnings within a five percent accuracy level a quarter in advance.

Because the study had no breakout by industry (likely because of the small sample size), there is no way to tell how high tech companies did comparatively. But it would seem foolish to assume that they were on the whole significantly better than other industries.

Tags: Revenue, Study, Industry, Forecasting, Operational Accounting, Strategy, Finance, Management, Erik Sherman

Erik Sherman is a freelance journalist whose work has appeared in Newsweek, the New York Times Magazine, Technology Review, the Financial Times, Chief Executive, and other publications. Follow him on Twitter.

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1

conlad

07/17/09 | Report as spam

RE: Study Shows Companies Terrible at Forecasting Cash Flow

And that's why, among other things, that a credit crunch is so harmful for current companies. They compensate this inaccuracy in cash flows by either, as you said, cash reserves of which few posses, or with credit lines.

This, also, points to one major problem: demand forecasting. There exists tons of techniques to estimate your demand, even really complex softwares exist to try and give accuracy to this part. Still, they all rely on human factors for their information and variables for the uncertain future. So what can be done? My take is on, yes, keep forecasting but do so based on scenarios (and set clear metrics to warn you about what scenario reality is pushing you to) and never forget risk management.

On high tech companies, I think this forecasting is even harder due to the nature of customers and the products offered. As well pointed out, giants have huge cash reserves ready at hand, but the smaller ones must rely on careful scenario planning, watching and then executing at light speed (which their size allows them to).
2

chleoku@...

07/18/09 | Report as spam

RE: Study Shows Companies Terrible at Forecasting Cash Flow

Good insight. Being one of the old timers in cash forecasting, I actually have a very cynical view on projections. Lots of companies make the number tell the story when projecting cash flow.

It is very important to stay true and hungry during cash flowing planning, especially for entrepreneurs:

http://www.wealthalchemist.com/Blog/2009/06/10-quitting-self-employed/
3

ErikSherman

07/19/09 | Report as spam

RE: Study Shows Companies Terrible at Forecasting Cash Flow

I agree that scenario forecasting makes a lot of sense, particularly the less cheery assumptions.
4

Neil Robertson

08/12/09 | Report as spam

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Neil Robertson
CEO
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http://www.compleatsoftware.com