Forecasting with confidence

2008-06-04 00:00

All organisations use forecasting to predict and manage their future performance. But although organisations invest significant time and effort in this important task, only one in five currently produce a forecast that is reliable.

KPMG International in conjunction with the Economist Intelligence Unit (EIU) surveyed over 540 senior executives involved in the forecasting process from a cross section of industries, including 168 CFOs.

The research builds on previous findings that cited planning, budgeting and forecasting as the CFOs’ top priority for improvement over the next three years.

The report’s key findings include:

• Unreliable forecasting costs organisations money. Over the last three years, only one percent of firms have hit forecasts exactly, and just 22% have come within five percent either way. On average forecasts have been out by 13%.

Executives in the survey estimate that such errors have directly knocked six percent of their share price over the same period, a significant part of which resulted from investor reaction.

Those companies which were “good” forecasters (i.e. which kept inaccuracies below the five percent mark) saw their share prices rise by 46%, over a third more than “poorer” forecasters over the same period.

• The process needs fixing. Improvements need to be made to enable more reliable forecasting.

• Data used for forecasting are often inaccurate or incomplete.

• Information technology is too often a hindrance than a help.

• Forecasting should not be the preserve of finance. It is a mistake to think of forecasting as a discipline that should be left to the finance department. Certainly financial professionals have a leading role to play, but it is essential to give the operational managers that drive performance greater ownership and responsibility.

• Leaders demand honest forecasting. The survey suggests that companies are much more likely to outperform rather than underperform their predictions. This suggests that managers, consciously or unconsciously, are being too conservative in their estimates.

What emerges clearly is that high-performing companies usually take the forecasting process very seriously. Armed with better quality, forward looking information, executives at these organisations are able to make better decisions about the future of their business.

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