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%, according to a study of 70 multinational companies by The Hackett Group.
We’ve all seen cases where missed earnings projections led to sharp stock declines, CFO firings, or worse. But often companies don’t take the steps necessary to get better at forecasting, Hackett analysts say.
“It’s shocking to see this level of poor performance in such a key area,” said Fritz Roemer, who leads Hackett’s Enterprise Performance Management Executive Advisory Program.
(Accurate forecasts, for the Hackett study, are defined as being within 5% of actual results.)
Hackett recommends the following improvements:
- Move from year-end to rolling forecasts, which enable companies to more accurately match forecasting horizons to the turbulent reality.
- Consider business risk and volatility when determining forecasting frequencies and horizons. (A company in a low-risk, low-volatility environment might manage with a six- to eight-quarter rolling forecast updated twice per year. But a company in a high-risk, high-volatility environment might find a rolling forecast updated monthly to be more appropriate.)
- Set accuracy targets for forecasting. (While most companies measure forecast accuracy, only 20% currently maintain accuracy targets.)
A final note: The Hackett study indicates the business world seems to be getting more volatile and risky, which naturally makes forecasting all that much harder to do. Hackett found that “14% 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.”