Study Shows Companies Terrible at Forecasting Cash Flow

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.