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TheStreet Open House

Most Companies Fail To Accurately Forecast Working Capital Needs And The Cash To Support Them, Says New Study By REL Consulting

Despite a global business environment where companies can be harshly punished by Wall Street for even small missteps in predicting revenue or earnings, most large companies say they cannot correctly forecast operational basics like inventory, receivables, payables, and the underlying cash requirements to support them, according to the results of a new study from REL Consulting, a division of The Hackett Group, Inc. (NASDAQ:HCKT).

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

The new REL performance 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. Typical large companies in the annual REL 1000 analysis could generate nearly $2 billion in additional cash annually by optimizing working capital management to match the performance of top companies in their industry. This included an opportunity to net over $680 million from optimizing receivables, over $620 million from payables, and over $680 billion from inventory.

"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.

"At the same time, it's not surprising to see companies continuing to miss the mark on working capital optimization," said Ms. Heald. "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."

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