When formulating projections (e.g. revenues, costs,
profits etc.), it is very common to encounter all types of pitfalls: numbers
fallen from heaven, conclusions that make no sense, numbers which reflect a
mismatch with the company strategy, etc.
To make matters worse, it is quite typical that the
person who must present the projections has just had a one-hour meeting with the
person who has prepared the projections’ foundational calculations (i.e. first
time to understand the numbers…). From there to complete disaster, there are
few steps...
Whether you are a CEO, manager or analyst, when developing
any type of projections (e.g. commercial, financial or operational), it is
essential to consider the following points:
• Have
analytical rigor: when analyzing the numbers, it is very important to
understand from where they come. When I question my clients on the origin of
the numbers used in their projections, it isn´t unusual to find that those numbers
are based on the "experience" of a manager or director. Numbers
cannot fall from the sky. They must be backed up by reliable and tested data. Such
data can be a measured benchmark, the past performance of the business,
industry projections etc.. The key message here is: numbers have to come from
somewhere other than "someone's brilliant mind".
• Work
with assumptions... and make them reasonable: for any
type of projection, it is possible to give a 1-hour, 1-day, 1 week, 1-month or
6-month response. What is key from the beginning is to work with a comprehensive
view of the projection, and for this view to serve as a reasonable starting
point for a first discussion. Over time, the assumptions can be refined and
adjusted. A tip here: it is not necessary to work with exact numbers; data
ranges work fine.
• Create
alternative scenarios: most of the time two scenarios are enough (e.g. conservative
and aggressive scenarios). The point here is to broaden the discussion in order
to understand (i) whether the projection is on track, (ii) what level of
resources are required (investments, people, systems, etc.), and (iii) what are
the implications of each scenario (loss of market share, improved share price
etc.).
• Ask
yourself whether the conclusions drawn make sense: once the
numbers have been analyzed rigorously, the premises have been tested and sound
reasonable, and the scenarios have been created ... do the findings make sense?
E.g. the projection concludes that the company will increase its profits 20% by
reducing revenues 15% and increasing the cost of goods sold 8%? Evidently, there
is something wrong in the logic... It may be necessary to review the aforementioned
points and, from the answers that may arise, develop a new projection.
In order to address all these points you need to stay on top of what happens in the process of formulating projections. This aim is not achieved by simply having a 2-3 hours meeting with the person who worked on the projections’ foundational calculations the day before the presentation. Nor does it mean that you have to prepare 100% of each projection from scratch. It rather implies that you need to convey very clearly at the outset the desired objectives and do periodic check-ups with the person preparing the calculations and building the projections’ foundations. Often 30 minutes of conversation on a regular basis is more worthy than sporadic check-ups – sporadic check-ups most frequently end up being used to redo everything developed in past days, weeks or months without proper guidance.
