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Undertaken by KPMG in conjunction with the Economist Intelligence Unit, the research shows that 77 per cent of firms admit to forecasting errors and that these companies are costing shareholders money. Firms are losing on average around six percent of their share price as a result of their inability to provide accurate forecasts.

The implications of poor forecasting are that it costs money, jeopardises investor and shareholder trust and limits business performance. Although other factors affect share price, accurate forecasting is crucial if a business wants to be in a position to make decisions that can improve performance relative to the competition.

Companies which were “good” forecasters (i.e. which kept inaccuracies below the five percent mark) saw their share prices rise by 46 percent, over a third more than other, poorer, forecasters who achieved a rise of 32 percent over a three year period.

Art and science 

Scott Parker, Head of Financial Management at KPMG International and a partner in the UK firm, said that there is a very simple explanation as to why companies are generally poor at forecasting.

"It is because they don’t treat it seriously enough, seeing it as an art rather than a science. That is where they are wrong. It is a science - and failure to accept this is hitting businesses hard."

"As our research shows, poor forecasting can be equated to share price losses but the real impact goes deeper than that. Accurate forecasting is at the heart of any performance management process as it provides the reliable foundations on which heavyweight strategic decisions can be made. There is therefore an undeniably strong correlation between poor forecasting and weaker business performance.”

The KPMG research – revealed that only one percent of the 539 companies questioned could lay claim to having provided completely accurate forecasts. A further 22 per cent felt they limited inaccuracies to between one and five per cent.

Deeper malaise 

Scott Parker continued: “An inaccurate forecast can be damaging as it can cause a single hit on share price performance but this is about a deeper malaise. This is about companies which are making forward-looking decisions based on forecasts which are unreliable, which in turn are based on incomplete performance data, using IT systems and processes which may not be fit for purpose.”

“Companies have always had a tendency to ‘low-ball’ their forecasts; providing numbers which they knew they would exceed. To some extent, that is human nature and is very difficult to change but companies need to address this or they will remain in the dark about their own performance. As one survey respondent put it, if actual sales are 20 per cent higher than you forecast, how do you accurately meet demand? Perhaps even more damaging though are the forecasts which over-promise but under-deliver as such inaccuracies can seriously affect the trust which institutions, investors and analysts have in a company.”

"If overall share prices continue to rise, some may be tempted to question how big a deal this actually is. Well, it is a major issue. Lower market confidence and trust result in share prices being lower than what they could or should be. This equates to a lower market cap which could equate to a reduced ability to raise cash which, in turn, could equate to a reduced ability to pursue strategic goals."

He stresses that all this is before the implications of a business being unsure over its own, actual performance are even considered. Parker believes that poor forecasting not only shakes investor confidence, it prevents the application of an extremely useful tool in strategy setting and performance management.

In addressing the issue, KPMG recommends that CFOs do treat forecasting more as a science and not an art, driven by gut instinct and intuition. Organisations which perform well in this area prove that it is possible. They apply proper rigour to the process and use it as a management tool. In addition, they embed forecasting discipline into the culture of the organisation. None of this is easy but – done correctly – it can add measurable, long-term value to any business.

Related links

• KPMG
• Forecasting with confidence (full report)