Reasonable Financial Projections - May 2021

Tue, May 11, 2021

If someone built an apartment building in the worst section of your town and used the cheapest materials possible, the sign in front of that building would say, “Luxury Apartments.” That’s because the word “luxury” is virtually always used to describe any apartment building. I’ve also rarely reviewed projections that were not described as “conservative,” even if they were wildly optimistic. Just don’t use that word in relation to any financial projections you might compile. It may not only be wrong but can also adversely affect a reader’s reaction to the projections. People who review projections on a regular basis see that word too often and don’t believe it when they do. 

In addition, most of the “conservative” projections I’ve reviewed follow the hockey-stick pattern that shows the past, short-term, flat performance of a company followed by an overly dramatic increase in revenues and profits projected for the future. Many of these hockey-stick projections are based on some exaggerated view of the market for the company’s products or services. “If we can only sell our widgets to 1 percent of the 300 million people in the US, we’ll all get rich.” But you can’t reach all 300 million of those people cost effectively. Don’t ever base revenue projections on total market size but on the market that you can actually reach and sell. Then describe how you will reach and sell to that market and show in the projections a realistic cost of doing that. Read More

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