Most companies miss annual forecasts: KPMG

For most companies, creating a yearly forecast is as integral to its business as selling its product. But what if that forecast is consistently wrong? A new KPMG study reveals that most organizations are missing their forecasts, and it’s causing share prices to tumble.

The survey, entitled Forecasting with Confidence, reports that only 22% of companies came within 5% of their projections, a serious problem, says John Herhalt, practice leader, operations improvement, at KMPG.

“If organizations regularly don’t achieve forecasts, it’s clearly a question of confidence [in the company],” he says. “If I’m not developing good forecasts, then how is that impacting the way I allocate resources, how I invest in things; how is it impacting my strategic initiatives?”

Herhalt points out that underestimating targets is just as detrimental as overestimating performance. In fact, many of the 544 senior executives surveyed for the report said that their companies are likely to outperform their predictions. That could be a result of CEOs’ intentionally forecasting lower so when the company fares better, they’ll look good and keep their bonuses.

“This could be because of sandbagging,” explains Herhalt. “As well, this may happen because of incentives or consequences. [The thinking is that] it’s better to under-commit and over-deliver. Who wants to over-commit and come in under [expectations]?”

Missing targets could result in share prices dropping, but coming within 5% of a forecast often has a positive effect on share prices. The study found that companies that landed within 5% of their actual performance saw share prices increase 46% over the past three years, compared to 34% for others.

If that’s the case, why do companies continue to forecast inaccurately? Herhalt says that outside of sandbagging, many forecasts are simply not done well. To create a solid financial plan, businesses need to work with people in every part of the business, something a lot of senior executives don’t do.

“Internal data isn’t everything it should be,” he says. “Forecasting isn’t just a preview for financial people. It requires the whole organization to be engaged. You need to have a good cohesive and comprehensive framework in the organization and get all players involved.”

The survey also found that forecasts are hurt by poor technology. “Information technology is too often a hindrance, not a help,” says the report.

Despite all the problems, Herhalt thinks CEOs are beginning to understand the consequences of inaccurate forecasting. He explains that companies realize that in order to succeed, they need to keep investor confidence high, something they can’t do if they consistently miss their estimates.

One thing in these companies’ favour, though, is that investors and analysts usually base their opinions about an operation on more than just forecasts. “Investors and analysts look at a whole bunch of info,” says Herhalt. “They don’t just take forecasts at face value. That said, if they look at information and they have different views and challenging questions … then it’s a question of confidence.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com