Only a fifth of banks produce reliable forecasts

27 November 2007

Just one bank in five produces reliable company forecasts, with investors punishing poor forecasting by cutting bank share prices by six per cent, new research has shown.

According to the Economist Intelligence Unit's survey, the 22 per cent of banks which produced forecasts that had an error margin of less than five per cent have seen their share prices rise by 46 per cent over the last three years, compared with 34 cent for those which were less accurate.

"Those companies that do meet forecasting targets are high-performing companies able to make better decisions about their future," John Herhalt, practice leader, operations improvement, for KPMG Advisory Services, which commissioned the study, told the Financial Post.

In the survey of 544 senior executives around the world, of which half worked for a firm that generated over $1 billion in revenue a year, half of the bosses believe the reliability of their financial data for forecasting is "adequate" or worse.

While 40 per cent of firms rely solely on spreadsheets to create their forecasts, a third of bosses said the technology they use to produce predictions is a "notable impediment".

This is borne out by the fact that forecasts have been out by 13 per cent on average over the past three years, with just one per cent of firms producing a wholly accurate forecast.

KPMG said that the firms that produced the most reliable forecasts tend to use more advanced software.

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