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July 16, 2009
ATLANTA & LONDON, July 16, 2009 - 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, Inc. (NASDAQ: HCKT), its REL working capital division, and the National Association of Corporate Treasurers (NACT).
This uncertainty creates a potentially dangerous scenario when combined with shrinking levels of cash on hand in most industries, plummeting revenues, reduced margins, and limited availability of credit and cash from other external sources.
The Hackett study found that only 22 percent of companies say they can forecast mid-term (2-3 months out) operating cash flow to within 5 percent accuracy. Previous Hackett research also showed that only one in three companies can forecast earnings to within 5 percent 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 percent are able to forecast mid-term cash within 5 percent 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 major findings from the study looked at how companies must improve organizational collaboration and alignment and the underlying technologies that support cash forecasting. Specifically, about 70 percent 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 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. Top performers drive greater effectiveness by achieving much higher levels of intimacy with customers and suppliers, developing a better understanding of their customers' financial positions, and conducting more frequent credit reviews. They also have more structured, interactive customer and supplier dispute processes in place.
A related Hackett survey also found that while forecast accuracy is measured by most companies, 80 percent don't set accuracy targets and 85 percent don't have any form of incentives in place to promote improved forecasting accuracy.
The study identified several other best practice areas where top performing companies focus to improve their ability to forecast cash flow. Performance management is one area where the best companies excel. Top performers are much more likely to rely on an array of analytical techniques to turn cash forecasting information into business insight. They look at operational leading indicators and macroeconomic assumptions 40 percent more often than typical companies, are 62 percent more likely to rely on best/worst case assumptions, and turn to what-if analyses 79 percent more frequently.
Top performers also provide more detail to their analysis, and are about 50 percent more likely to offer a range of numbers, footnotes, and scenario analysis as part of their forecast.
The study is based on responses from 85 US and European companies with average revenue of over $12 billion.
"It's disturbing to think that most companies are virtually flying blind in this critical area," said Hackett Chief Research Officer Michel Janssen. "This problem is by no means a new one. But it's been exacerbated by the current economic climate, where it's more critical than ever for companies to be able to understand and predict their cash flow from operations."
According to REL President Mark Tennant, "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 Hackett Group, Inc. (NASDAQ: HCKT), a global strategic advisory firm, is a leader in best practice advisory, benchmarking, and transformation consulting services, including shared services, offshoring and outsourcing advice. Utilizing best practices and implementation insights from more than 4,000 benchmarking engagements, executives use Hackett's empirically based approach to quickly define and prioritize initiatives to enable world-class performance. Through its REL brand, Hackett offers working capital solutions focused on delivering significant cash flow improvements. Through its Hackett Technology Solutions group, Hackett offers business application consulting services that helps maximize returns on IT investments. Hackett has worked with 2,700 major corporations and government agencies, including 97% of the Dow Jones Industrials, 73% of the Fortune 100, 73% of the DAX 30 and 45% of the FTSE 100.
Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in 1997. Answerthink was renamed The Hackett Group, Inc. in 2008. The Hackett Group has global offices in the United States, Europe and Asia/Pacific.