Are Your Forecasts Reliable?
All organisations use forecasts 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.
This is according to a research report by the Economist Intelligence Unit and KPMG. Key findings include:
Unreliable forecasts cost organisations 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*.
The first priority, cited by 42 percent of respondents is the need to use technology to automate the forecasting process. A similar proportion believes 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.
Information technology is too often a hindrance rather than a help
Over one-third of respondents considered the technology their organisations currently use for forecasting to be a notable impediment. Nearly all organisations still use spreadsheets for some parts of their process; more worryingly, however, 40 percent of them rely solely on spreadsheets to produce the forecast. It is possible to produce a reliable forecast using these basic tools, but the survey shows that organisations with the most accurate forecasts are more likely to use more advanced software to do the job.
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 for key parts of the forecasting process. The most accurate forecasters in the survey are already more likely to do this. But there remains 39 percent of companies that do not assign any responsibilities to their business managers for this task.
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. The possible reasons run from natural human caution to "sandbagging” to protect bonuses.
Separating the best from the rest to see how organisations could improve their forecasting, they differ in some important ways:
- Hold managers accountable for agreed forecasts
- Incentivise managers for forecast accuracy
- Use the forecast for ongoing performance management
- Use their forecasting to help with formal earnings guidance
2. They look to enhance quality beyond the basics
- Are more interested in further scenario planning and sensitivity analysis
- Have less need to train further finance staff in forecasting
3. They leverage information more effectively
- Use external market reports and competitive data more often
- Have forecasts done more often by operational managers who are closer to where business takes place
- Give their internal input data a higher rating for reliability, timeliness, relevance and insightfulness.
4. They work harder at it
- Update forecasts more frequently
- Are more likely to review the figures formally
- Forecast key balance sheet indicators more
- Make greater use in the forecasting process of software more advanced than spreadsheets, such as ERP systems
5. They benefit their shareholders / partners
- Attribute lower declines in share price directly to forecasting over the last three years
- Saw shares rise faster over the same time period
Accurate forecasts are just as important for professional partnerships as for companies, enabling them to make better decisions about the business, and so enhance profit per equity partner and manage partner.
* Calculated as the mean absolute deviation from actual results.
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