CFOs: mistakes on your free cash flow forecast? It could soon cost you (yes, you).

By Kyriba June 3, 2015

It’s recently been announced that the SEC will soon propose regulation that will force public companies to claw back executive team incentive pay, if there is a need to restate the financial statements that led to the award of the incentive1.

While the best interests of shareholders should certainly be an incentive for the CFO to ensure that financial statements are in good order, the prospect of a direct financial hit adds a new, personal, depth to the need for them to ensure statements are 100% accurate.

Of course, as scandals such as Enron and Tyco showed, many of these “errors” were accounting-based, as a result of pressure being put on teams to inflate earnings / hide losses to improve the balance sheet and stock price. However, there are some areas where incorrect data provided by the treasury team could have serious implications, even if the mistake is genuine. For, example, at companies that provide guidance for future quarters’ earnings, free cash flow is increasingly becoming one of the areas previewed, and this is a direct responsibility shared by the treasury department and FP&A teams. And while guidance is not the focus of this particular SEC initiative, it won’t be far behind given the impact that forward looking guidance has on share price.  

So, if your cash forecast is inaccurate due to a lack of timely data from within the organization, errors stemming from data inaccurately modeled in a spreadsheet, or a lack of confidence in the forecasting process leading to unexplained variances, it could have a very tangible impact on the free cash flow guidance that is offered.

Given that 40 percent of treasuries report that a lack of visibility into liquidity and cash forecasts is one of their three most pressing concerns for the coming year2, this suggests that the possibility of errors being made in free cash flow forecasts is a very significant concern for public company CFOs. The ability to establish reliable, accurate free cash flow forecasts is not just a nice-to-have, but could have a very real impact on the CFO’s personal financial well-being.

Further reading

1. SEC Eyes Broadened ‘Clawback’ RestrictionsThe Wall Street Journal, June 3, 2015

2. Kyriba / Association of Corporate Treasurers 2015 Treasury Survey


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