Business forecasts not accurate: Study

Only one in five organizations are close in financial projections
|hrreporter.com|Last Updated: 02/26/2009

While almost every organization uses forecasts to predict and manage their future performance, only 22 per cent came within five per cent of their projections, according to the results of a global study.

The study,

Forecasting with Confidence

, was conducted by the Economist Intelligence Unit (EIU) on behalf of KPMG International and was based on the replies of 544 senior executives, 30 per cent of them chief financial officers. Respondents were drawn from a cross section of industries and 59 per cent were from organizations with more than $1 billion US in annual revenue.

Unreliable forecasts cost business money

The study shows that unreliable forecasts cost organizations money. On average forecasts over the last three years have been out by 13 per cent. Executives in the survey estimate that such errors have directly knocked six per cent off their share prices over the same period, mainly because of investor reaction.

"Earlier research by KPMG had already told us that CFOs were unhappy with their current forecasting capabilities," said John Herhalt, practice leader, operations improvement, KPMG Advisory Services. "By digging deeper in to this critical finance function, we see very clearly that those companies that do meet forecasting targets are high performing companies able to make better decisions about their future. It is obvious that good forecasting pays."

Study highlights

Highlights from the study include:

•firms with forecasts that came within five per cent actual saw share prices increase by 46 per cent over the last three years, compared with 34 per cent for others;

•despite the fact that leaders demand accurate forecasting, companies are much more likely to outperform rather than under perform their predictions. Possible reasons run from "sandbagging" to protecting bonuses;

•outperforming the forecast means important decisions such as resourcing and investment choices are being made on the basis of inaccurate or incomplete information;

•almost 50 per cent of companies surveyed believe the reliability of their financial data for forecasting is merely adequate or worse while a majority think the same of their non-financial data;

•organizations largely use internally generated data — only 40 per cent use government economic reports (and two out of the four areas where companies say they make forecasting errors are consumer demand and economic drivers, both of which could be helped by readily available external data); and

•information technology is too often a hindrance not a help.

High performing companies take forecasting seriously

"What emerges clearly from this study is that high-performing companies usually take the forecasting process very seriously," said Stephen Spooner, Western practice leader, KPMG advisory services. "Armed with better quality, forward-looking information, executives at these organizations are able to make better decisions about the future direction of their business."

About the study

KPMG commissioned the Economist Intelligence Unit (EIU) to conduct a global survey of 544 senior executives, 30 per cent of whom were chief financial officers.

The survey covered a cross-section of industries and 51 per cent of respondents were from organizations with over US$1 Billion dollars in annual revenues. To supplement the survey, EIU conducted a program of interviews with senior executives, as well as academics and experts in the field.

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