All organizations use forecasts to predict and manage their future performance yet only 22% came within 5% of their projections, according to the results of a global study initiated by KPMG LLP.

The research study,was conducted by the Economist Intelligence Unit (EIU) on behalf of KPMG International and was based on the replies of 544 senior executives, 30% of them chief financial officers. Respondents were drawn from a cross section of industries and 59% were from organizations with over US$1 billion in annual revenue.

The study shows that unreliable forecasts cost organizations money. On average forecasts over the last three years have been out by 13%. Executives in the survey estimate that such errors have directly knocked 6% off their share prices over the same period, mainly because of investor reaction.

“Earlier research by KPMG had already told us that CFO’s were unhappy with their current forecasting capabilities,” says John Herhalt, practice leader, operations improvement, KPMG Advisory Services. “By digging deeper in to this critical finance function, we see very clearly that those companies that do meet forecasting targets are high performing companies able to make better decisions about their future. It is obvious that good forecasting pays.”

Firms with forecasts that came within 5% of actual results saw share prices increase by 46% over the last three years, compared with 34% for others.

Despite the fact that leaders demand accurate forecasting, companies are much more likely to outperform rather than under perform their predictions. Possible reasons run from “sandbagging” to protecting bonuses.

Almost 50% of companies surveyed believe the reliability of their financial data for forecasting is merely adequate or worse; a majority think the same of their non-financial data.

Organizations largely use internally generated data — only 40% use government economic reports. Two out of the four areas where companies say they make forecasting errors are consumer demand and economic drivers — both of which could be helped by readily available external data.

“What emerges clearly from this study is that high-performing companies usually take the forecasting process very seriously,” says Stephen Spooner, western practice leader, KPMG Advisory Services. “Armed with better quality, forward-looking information, executives at these organizations are able to make better decisions about the future direction of their business.”