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Companies failing at WC forecasting

MOST LARGE companies say they cannot correctly forecast operational basics like inventory, receivables, payables, and the underlying cash requirements to support them, according to REL Consulting.

According to the study, typical companies potentially miss quarterly working capital forecasts (including inventory, receivables, and payables) by up to 23%, which amounts to up to $600m (£387m) million for a typical Global 1000 company (with $29bn annual revenue).

The study, Working Capital: Successes, Challenges, and 2012 Objectives, found that most companies have been unable to improve the long-term efficiency or effectiveness of their working capital performance over the past decade.

“It’s disappointing that even after the economic turmoil of the last few years, companies are still struggling to get this key area under control, and failing to drive sustainable improvements in working capital,” said Veronica Heald, director, REL Consulting. “In some ways, forecasting cash is even more critical than forecasting earnings or revenue. You can take a hit quarter after quarter for missing earnings. But you can only run out of cash once. Failures in this area easily lead to everything from the need to turn to emergency credit lines to lost sales and missed opportunities.

Recommendations to improve forecasting from REL included reconciling functional and strategic operations, incorporating working capital performance as in employee rewards and improving staff training.

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