Forecasting with confidence
All organizations use forecasts to predict and manage their future performance. But although organizations invest significant time and effort in this important task, only one in five currently produce a forecast that is reliable.
This new research report by the Economist Intelligence Unit is based on a global survey of over 540 senior executives involved in the forecasting process from a cross-section of industries, including 168 CFOs.
The research builds on a previous report by KPMG International in cooperation with the Economist Intelligence Unit. In Being the best: Insights from leading finance functions, senior finance professionals from a range of global organizations cited planning, budgeting and forecasting as (1) the key area in which CFOs were most dissatisfied with their current capabilities and (2) their top priority for improvement in the next three years. With this in mind, KPMG International has commissioned the EIU to provide insights into some of the latest trends and challenges in this field.
The report's key findings include:
Unreliable forecasts cost organizations money
Over the last three years, only one percent of firms have hit forecast exactly, and just 22 percent have come within five percent either way. On average, forecasts have been out by 13 percent*. Executives in the survey estimate that such errors have directly knocked six percent off their share prices over the same period, a significant part of which resulted from investor reaction.
The impact of poor forecasting has a deeper effect through its impact on strategic and operational choices. Although other factors are undoubtedly at play, firms with forecasts that came within five percent of actual saw share prices increase by 46 percent over the last three years, compared with 34 percent for others. Clearly, good forecasting pays.
The process needs fixing
Finance executives in the survey point to three main process areas where improvements need to be made to enable more reliable forecasting. The first priority, cited by 42 percent of respondents is the need to use technology to automate the forecasting process. A similar proportion believe scenario planning would be a useful tool to understand future developments that could impact the forecast. Finally, 40 percent of respondents also believe rolling forecasts would be highly beneficial in improving their performance in this area.
Data used for forecasting are often inaccurate or incomplete
Almost half of surveyed organizations believe the reliability of their financial data is merely adequate or worse; a majority think the same of their non-financial data.
Organizations largely focus on internally generated data at the expense of gathering broader market data: for example, only 40 percent use government economic reports in their forecasting processes. Tellingly, two of the four areas where organizations say they make forecasting errors are consumer demand and economic drivers - both of which could be helped by the use of readily available external data.
*Calculated as the mean absolute deviation from actual results.
© 2010 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
© 2010 KPMG AB, a Swedish limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
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