It’s an unfortunate double whammy: Cash flow at many companies has both declined and become more difficult to forecast. Recent research from Hackett Group and the National Association of Corporate Treasurers found that just over one in five companies is able to develop a forecast of cash flow two to three months out that’s accurate to within five percent. About one-third of forecasts are accurate to within 10 percent and one quarter to within 15 percent.

Why the less-than-stellar results? To start, sales have become more difficult to predict, as both business and consumer customers have cut purchases and put pressure on prices. On top of that, instability is growing among both customers and suppliers, the study found. One result is a ballooning number of late payments; nearly half of the companies responding said that between 11 and 30 percent of their receivables were past due.

That said, some firms do a better job than others. Nearly three-quarters of top performers can forecast midterm cash flow to within a five percent range; the remaining organizations do it to within 10 percent. What’s more, they’re able to complete their forecasts more quickly and with fewer people. For instance, 25 percent of top performers require less than a day to complete their forecasts; that compares with 11 percent of the peer group. And, the forecast process requires just one or two people at one-third of the top performers; only 23 percent of the peer group can get by with as few.

To get there, these principles are key:

• Top performers are better able to turn information into insight. That is, they take information and develop best- and worst-case scenarios and perform what-if analysis, all of which can inform management decision-making.

• They are closer to both customers and suppliers, and are more likely to use structured dispute resolution processes and formally analyze the causes of disputes. The result? They gain a better handle on cash inflows and outflows.

• They leverage technology to get reliable information. Here, however, it appears that both top and middling performers have room to improve — spreadsheets were used to develop the forecasts either frequently or always at almost all the companies, including companies among both the top performers and the peer group.

• They measure accuracy and set accuracy targets. While many companies measure the accuracy of their targets, fewer set goals for accuracy. Top performers are more likely to do this.

• Their organizations boast high levels of collaboration. Their treasury departments are more likely to work with operations and planning and analysis to develop cash forecasts.

Given the continued tightness and unpredictable nature of today’s economy, it’s definitely worth treasurers’ time and efforts to try to nail down their processes for forecasting cash flow. ###