Pitfalls of Precise Projections

Creating financial projections is a critical discipline, particularly for growing companies seeking capital and needing to share revenue and expense forecasts with investors and creditors. However, this cannot be a “set-it-and-forget-it” exercise. Supplier disruption, competitive threats, and changing consumer behaviors can quickly derail demand expectations in either direction, affecting income and expense projections. Financial models are made to adapt to a mercurial market, assuming financial managers measure, monitor, and readjust projections in light of business and market shifts. Companies that take great pains to develop highly detailed forecasts, only to shelve the work once it’s done, face 3 key consequences:

  1. Squandered resources on outlooks that quickly become obsolete; this is particularly damaging to companies in early growth stages with limited time, money, and personnel
  2. Exposure to risk, such as overspending against expected but not actualized growth
  3. Lost opportunities to pivot with market or business changes

“Based on meticulous forecasts, we’d expected a banner year,” one startup client lamented, “but hadn’t anticipated changes in market demand. We thought we’d done the due diligence upfront and were steering the ship with one outcome in mind, which made it hard to be convinced to change course.”

To avoid these pitfalls, companies should consider the following forecasting best practices:

Lead with Strategy: An organization’s corporate strategy creates a “true north” around which planning and budgeting choices can clearly align. A strategy-first budgeting approach establishes a consistent platform for financial decisions, focuses value creation around leading organizational priorities, and enriches forecasts by looking beyond the ledger. [NeuBrain] Widening the set of stakeholders engaged in the forecasting exercise – and tying incentives to milestones met – builds a broader organizational commitment to transform a strategic goal into a measurable outcome. [Entrepreneur 

Review and Refresh: Organizations that continuously monitor and optimize forecasts have the benefit of comparing current data against projections to uncover inconsistencies. By anticipating variances, companies have the ability to take corrective actions to stay on strategy and on budget. Ongoing oversight will also shorten budget cycles, making the process less of an annual exercise and more of an incremental update. Here, automation and analytics can deliver speed and streamline reporting dashboards to create a common understanding of performance drivers in relationship to future outcomes and opportunities. [NeuBrain]

Expect the Unexpected: In an unpredictable marketplace, even the best managed forecasts can fall short. Instead of building budgets exclusively on past experience, organizations must create forecast flexibility to make room for the “what if” scenarios. [KPMG]

Companies able to balance strategic consistency, forecasting discipline, and flexibility in the face of meaningful market change will quickly separate themselves as leaders. Whether you are seeking to refine your existing projections process or are unable to maintain fresh forecasts given current resources, our team can provide a right-sized solution. To learn more, contact me at lglennon@navitance.com.