• 83% of directors feel they cannot trust the sales forecasts they are given
• 72% of directors apply a discount factor of between 5% and 90% to sales forecasts
• 53% of directors believe they do not have the financial resources to survive a 10% shortfall in revenue for three consecutive months
• 50% of directors believe their bank are unlikely provide extra support if it is needed
• NXDs lead the way with the need to focus on cash management
• Research highlights cash management and director compliance issues

Many businesses are running the risk of running out of cash simply because they rely on inaccurate revenue forecasts according to research published today. It highlights that 83% of directors do not trust the sales forecast they are given.

As a result almost three quarters (72%) apply a discount factor of up to 90% - with the average discount factor being 34%. The cash implications of this level of potential inaccuracy are significant as over half (53%) of directors do not believe they have the cash resources to survive a shortfall in revenue of just 10% for three consecutive months. And, 50% of directors believe their bank is unlikely to provide additional cash support if needed.

Cash management is king but revenue consistently fails to match forecasts
While two thirds of directors (64%) rank cash management as their number one priority, over eight out of ten (83%) feel that they cannot trust the sales forecasts they are given – making cash management much more challenging. This challenge (and the reason for the distrust) is confirmed by the fact that revenues consistently come in lower than forecasted. Two thirds (65%) of directors feel that forecasts have hyped revenue expectations at least once in the last three months. In fact one in five (21%) directors believe that sales forecasts have exceeded revenue every month for the last three months.

Cash resources are under threat by inaccuracies in sales forecasts
The threat this gap between promised and real income provides to businesses is highlighted by the fact that less than half of directors (47%) think they have the financial resources to manage just a 10% shortfall for three months. The significance of this gap is brought home by the fact that 72% of directors apply a discount factor to sales forecasts of between 5% and 90% with the average discount factor being over a third at 34%.In fact, almost four out of ten directors discount forecasts by 50% or more. One in 10 directors think that they would burst their bank facility if revenues miss forecast by just 10% for three months.

John Lowry, Chairman at Visual Insight, the company that sponsored the research, says: “My greatest anxiety is that too many good businesses will fail – not because their bank declines to provide the oxygen of cash (although this may be a contributory factor) but because directors continue to operate on the basis of a best guess when it comes to bookings, revenue and cash planning. In an economy starved of liquidity, operating on best guesses, when the safety blanket of a growing economy has been removed, could be deemed irresponsible by shareholders and raises serious implications for director compliance.”

Mixed views about the likelihood of support by banks – but demands could be high
There is an equal split between directors who think banks will advance further credit if needed and those that think they will not. Slightly more directors (9%) believe there is absolutely no chance of extra support than those that think it is guaranteed (7%).

If extra banks support is available, directors expect it to come at a price. Half of directors expect to provide directors guarantees to secure more credit; one in 14 expect the bank to demand a debenture or other physical assets as security; only three out of ten (29%) do not think the bank would demand any extra security.

Non-executive directors lead the way with a prudent cash view
Not only do NXDs lead the chart for giving cash management the highest priority (83%) but they also have the lowest levels of trust in the forecasts provided to them - 17% complete distrust and 83% partial distrust. If sales miss forecast by 10% for three months NXDs would expect redundancies and a third would expect the firm to go into administration. If more cash is needed, NXDs would look to alternative sources of private equity rather than approach directors or shareholders which are the preferred routes of other directors.

Chairmen seem less concerned by cash implications of shortfalls in revenue
Perhaps surprisingly, as the chairman is the guardian of shareholder interests, only 50% of chairmen assign cash management the highest priority. In fact chairmen have the highest levels of trust in the forecasts with 21% trusting them completely. However, if they have cause not to trust the forecast, they then apply the highest average discount factor at 46%. This may be because nearly all chairmen (83%) believe they have sufficient cash resources to ride a 10% shortfall in sales for three months and, 70% believe they have a very high probability of being advanced further credit by their bank if needed.

CEOs share distrust levels and lead cynicism about bank support
Almost eight out of ten CEOs discount sales forecasts by an average of 34%. Only four out of ten believe they have the cash resources to survive a 10% shortfall for three months with 23% expecting to cut costs and draw on a bank overdraft facility. One in ten would expect to burst this facility. One in eight believe the banks would not advance further credit with 60% ranking this as highly unlikely (1-5 on ten point probability scale).

CFOs will look for redundancies to balance the books
60% of CFOs will expect redundancies if revenue misses forecast by 10% for three months – twice as high as NXDs and five time the rate for CEOs at 12%.

James Anderson, CEO at Visual Insight, said: “This research is a wake-up call to directors who rely on guesswork to forecast their revenue. It highlights not only the potential for a huge gap between forecast and actual revenue but also the reality that this is happening on a regular basis. Before an organisation discusses cost reductions and redundancies, the directors should do all they can to make their revenue predictions more trustworthy.”

The research, published by Visual Insight in partnership with the FD Centre, Haywards LLP, Liverpool Ventures and Strategic Software Partners, was carried out online in the last quarter of 2008. 111 directors responded, 47% of which were CEOs. A copy of the research report, entitled ‘The business cost of the credit crunch - how directors are approaching the challenges of a cash-starved economy’ can be downloaded at www.visualinsight.com

For more information about Visual Insight please contact:
Crispin Manners at Onva Consulting on 07774 774272 or at This email address is being protected from spambots. You need JavaScript enabled to view it.