Here's a contrarian view on the apparently hot topic of cash forecasting amongst the CFO's agenda. Our sister company, The Hackett Group, recently published a survey of CFOs, and 70 percent rated cash flow forecasting as their top priority to be worked upon in 2011. Now, maybe I am being a little simplistic, but I find this strange.

Fast forward to the production planning department where we have been working with MRP and ERP planning systems for many years. One of the first lessons we learn is the immense difficulty it is to properly forecast. The only thing we can truly forecast for sure is that it will be wrong.

The one thing I have learned in this business is CFO's don't like (and can't afford) to be wrong very often. Some will joke that we just have to forecast the unforecastable and make the best of it. Right?

Wrong. The second lesson we learn down in the production planning department is don't forecast what you don't have to. Enter the concept of "dependent" and "independent" demand. Here in production when making widgets for chairs, for example, we quickly learn that we don't need to forecast the number of chair legs. If we are forecasting the number of chairs (A) we need (independent demand), then we automatically know that the number of chair legs (L) (dependent demand) we need will be L= A X 4.

Or perhaps we are selling dining room sets (B) that come with six chairs, which in this scenario the dining room set is independent and needs forecasting, the chairs and the legs are both dependent items. L = D X 6A X 4

It's simply unnecessary to apply any forecasting process or efforts to the legs. Just apply all the effort to the chairs (or dining sets in the second example), get that right, and the legs will follow. Of course, if you are making three legged stools too it gets more complicated.

Now, do you think "cash" is an independent demand item that needs forecasting at all? Or maybe it's a function of your sales patterns allied to production, purchasing, inventory control and collections.

All of these functions contain processes which should be reasonably under control and either governed by externally facing contracts with suppliers and customers telling us when and how much to pay, or by internal targets indicating policies and objectives on things like how much inventory we should have at any point in our supply chain. The cash balance is a function of the policy, efficiency and effectiveness of these processes.

The point is there is no need to forecast cash in a well-run business. It should be calculated. Anyone who is applying serious effort or cost to do so is papering over a business weakness presumably because they feel they have to or because they cannot fix the underlying causes.

In many businesses, the cash flow from operations and the inherent working capital will week in week out account for the majority of transactional volume and value that businesses find it hard to plan and predict accurately.

If the processes surrounding payables, receivables and inventories are effective and efficient, a business should be able to confidently predict the levels of cash required to run the business sensibly and the likely cash needs or balances at any given point. This is equally true in growth, decline, recession, or in the face of seasonal adjustments.

Rather than introducing another forecasting model that will no doubt be wrong, maybe a better priority would be to fix the underlying causes and better understand why it needs forecasting at all.

Gavin Swindell is a Principal for REL Consulting, a division of The Hackett Group, that specializes in cash flow improvement from working capital and across business operations.