Six ways to make more effective projections

by House of Control | Sep 14, 2020 10:35:11 PM

Projections are useful for more than the budget process. Companies with credible projections are preferred by investors and required by banks. Here are six steps for achieving higher precision in your estimates.

Both public and private organisations are already immersed in the process of planning the next financial year. Projections are a main feature of the budget process for 2019. But that is not the only reason they are useful: Realistic projections for future expenses and income are critical management information, when the CFO will provide input regarding the company’s strategic decision.

Every day, our customer success team speaks with customers who use Complete Control to improve their organisation’s budget process. They have compiled six steps which have, over time, contributed to more effective projections for our customers.

1. Consider multiple scenarios

A projection is not an optimistic goal for what the company may achieve in the coming financial year. A projection is an estimation on what the company – through a realistic lens – believes about the coming financial periods. Those who prioritise realism over wishful thinking are very aware that the future in particular is incredibly difficult to predict. We recommend that you consider a minimum of two potential scenarios, a cautious one and an optimistic one.

2. List the important assumptions

Each projection requires you to make assumptions about factors that are outside your control. We recommend that you write down the most important assumptions for each of the scenarios, including how changed assumptions will be able to affect the actual outcome of your estimates. This may be assumptions on prices, on the number of competitors, on technology, on market growth, on the “hit-rate” amongst the sellers, on re-purchase etc.

3. Plot your expenses

Large amounts of next year’s expenses are probably more or less given: Fixed costs such as rent, car rental agreements, insurance, licences, coffee machines and – not least – salaries. And exactly because these are predictable liabilities, their effects on liquidity should be quickly determined.

When Complete Control users specify what the most important product benefits are for them, they usually mention quick and precise projections first. In their experience, it is especially valuable that finalising this aspect of budgeting work is as easy as 1-2-3.

When the certain aspects of expenditure are so simple and not very costly to deal with, it leaves even more time for the uncertain aspects. How will the costs develop as you grow? What will changed energy prices and exchange rates mean?

4. Establish (your certain) revenues

Annual Recurring Revenues (ARR) are the positive counterpart to fixed expenses. This is contractual income that is almost completely secure. These can also be registered in Complete Control, something that we have called the user trend of 2018. Registering ongoing contracts in Complete Control, makes it simpler (with automatic notifications) to implement a planned follow-up of customers, to ensure their satisfaction and loyalty.

The less time that is used on the certain aspects of income, the more resources can be allocated to estimate growth in different verticals, geographical areas and/or product areas. In this way, complete control of the certain income contributes to better projections related to incomes with a higher degree of risk.

5. Find a company to compare yourself with

As mentioned in the introduction, projections are what you believe will happen, which is different from what you would like to happen. Therefore, it is sensible to verify the quality of these projections by looking at the results achieved by comparable companies. Comparable companies do not necessarily need to be in the same branch; they may also be companies of the same size or in the same growth phase.

The usual accounting figures, such as the operating margin should also be included in the comparison. You may also use industry-specific figures, such as revenue per square-meters of a shop, or number of customers per employee.

6. Evaluate and adjust as you go

At regular intervals, the projections for next year should be assessed against actual performance. This is important because projections as a rule are connected to estimated liquidity and financing requirements in the future. If actual results deviate a lot from the projection – either in a positive or negative direction – this will impact what your business can or must do.

The more up to date the estimates are, the better prepared you will be to make well-informed, strategic decisions.

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