Study: Most Companies Fail When Forecasting Earnings & Sales

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Despite a market environment where missed earnings projections can lead to sharp stock declines, CFO firings, or worse, most companies fail to accurately forecast earnings and sales, according to new research by The Hackett Group (NASDAQ: HCKT), a global strategic advisory firm.

According to results from Hackett’s new research, “Aligning Forecasting Practices with Market Dynamics,” two out of every three companies are unable to accurately forecast earnings for the next quarter, missing the mark by anywhere from 6% to over 30%. Companies do only slightly better when forecasting sales, according to Hackett’s research. More than half of the companies in the study were unable to accurately forecast sales for the next quarter. Accurate forecasts, for the study, are defined as being within 5% of actual results.

In addition, forecasting is becoming significantly more challenging, the research found. Fourteen percent of all companies in the study characterized themselves as high risk/high volatility, a seven-fold increase over just three years ago. And Hackett believes this is likely to continue to increase, perhaps by nearly 50% over the next two years.

“It’s shocking to see this level of poor performance in such a key area,” says Fritz Roemer, who leads Hackett’s Enterprise Performance Management Executive Advisory Program. “We’ve seen companies take severe hits in the past few years after missing forecasts. Analysts suddenly question the competence of senior leadership. Stock prices become unstable and valuations drop dramatically. In some cases, CFOs have had to resign. Yet companies still refuse to make the necessary efforts to get this area under control.”

Hackett’s Book of Numbers research outlines an array of ways world-class companies improve the forecasting process. Hackett recommends that most companies move from year-end to rolling forecasts, which enable companies to more accurately match forecasting horizons to the reality of turbulent market dynamics. Today, only about a third of all companies utilize rolling forecasts, and that percentage has not changed significantly since 2004. Hackett also recommends that companies consider business risk and volatility when determining forecasting frequencies and horizons. While a company in a low-risk, low-volatility environment might manage with a six to eight quarter rolling forecast updated twice per year, a company that sees its environment as high-risk, high-volatility might find a rolling forecast updated monthly to be more appropriate.

Hackett’s research also strongly recommends that companies set accuracy targets for forecasting. While the majority of companies measure forecast accuracy, Hackett’s research showed that only 20% currently maintain accuracy targets. Finally, the group found that leading companies manage forecasting accuracy by making the forecast bias transparent and successfully changing the behavior of forecasters.

“These are very basic steps that almost any company can use to significantly improve their forecasting,” according to Hackett Finance Practice Leader, Global Advisory Programs, Bryan Hall. “By using rolling forecasts, which force companies to look beyond the artificial horizon of their year-end, by considering risk and volatility, and by measuring accuracy in forecasting, companies can make real improvements in this key area, and reap rewards from the investment community.”

Hackett’s Forecasting Book of Numbers research analyzed results from more than 70 large U.S. and European companies. All of the participants operate globally. The research looks at five key perspectives on forecasting: Aligning Horizons and Frequency with Market Dynamics; Disentangling Forecasting from Budgeting and Management Reporting; Creating a Rolling Forecast that Works; Improving the Forecasting Process; and Creating Accurate Financial Forecasts.