"There's only one thing you know about your forecasts," says Steve Morlidge, former controller with Unilever Foods and currently director of consulting firm Satori Partners. "They will be wrong."
Forecasting, he explained at the recent Beyond Budgeting conference in Houston, is really all about decision-making. You first need to work out where you are heading, which is the forecast, and then when things change as they always do, you have to figure out what you need to do differently to get back on track.
A good forecast, Morlidge said, is timely, actionable, reliable, aligned and cost-effective. "There should only be one set of forecast numbers," he added, "but the unpredictable nature of the world needs to be taken into account."
"Unpredictable" certainly describes the situation facing most large public companies when it comes to forecasting their working-capital needs. According to a recent study conducted by REL Consulting, most companies are not able to accurately forecast such operational basics as inventory, receivables, payables and the cash requirements needed to support them. In fact, companies typically miss their working-capital forecasts by as much as 23%, which for a Global 1000-sized company represents $600 million.
"In some ways, forecasting cash is even more critical than forecasting earnings or revenue," says Veronica Heald, director of REL Consulting. "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."
The problem, she says, is that at most companies, finance takes full responsibility for working capital, "but truly optimizing receivables, payables and inventory requires a cross-functional effort. And often different parts of the organization may have very conflicting interests, and different priorities and goals that prevent them from achieving their working-capital goals." Working-capital improvement needs to be a strategic objective involving the entire C-suite, Heald recommends, not just the CFO.
