3 Common Mistakes When Creating Financial Projections
After landing in a new city, you step out of the airport and look around for a taxi. There’s one nearby, so you hop in – it’s hot, and you’re eager to get back into the AC. You give the driver the address, and he says, “sure thing!” After 20 minutes of driving, you notice he doesn’t have a GPS – or map – or clue as to where he’s going. When you point this out – rather concerned – he says, “don’t worry; the car is in great shape, and we’ll find it eventually!”
As a business owner, make sure you don’t drive around without a map, just because the car runs.
Solid projections show you here you are, where you’re going, and how to get from point to point – like a good map. What better demonstration of your prowess than accurately mapping out the future? However, a few simple mistakes can make your Projections seem amateur & unreliable, throwing doubt on what you can bring to the table.
Avoid these red flags:
Want to know the secret to happy lenders, investors, partners, & spouses? Under-promise, over-deliver. Seeing exponential growth in a set of projections is not a dangling carrot – it’s a warning sign.
Instead, be boringly realistic.
Confidence is excellent, but don’t simply be confident in your grit & determination – be confident in your numbers. Be confident in each of your assumptions. Be confident in your research and industry knowledge.
Above all, be confident that you can over-deliver.
At the end of the day, any future projections have some inherent level of uncertainty. Rounding your projections accordingly isn’t just an acknowledgement of that fact – it’s also a best practice. Having projections that are down to the dollar (or worse, the cent) is like a resumé with spelling errors. It doesn’t change the information – it just diminishes it.
Excel has the function =ROUND( ) that is there to help.
Typically, only round to the 10’s place if the annual total is less than 1,000. Otherwise, rounding to the 100 or 1,000 is preferred. The larger the annual total, the more rounded it should be; top-line revenue should always be rounded to at least the nearest 10,000.
Once you have a set of projections spread by month for the year, you’re done! Leave it alone! Don’t touch it! The second you fiddle around with it, it no longer serves its purpose. Report actual performance against the established projections each & every month to see if you are on the road you planned to travel.
A good set of projections is one of the few things that holds you accountable. As a business owner, you have the freedom to move the business any direction you want, to adjust to a changing market, to seize opportunities, and to pivot when needed.
However, there’s a difference between the map-less taxi driver and the one who hops off an exit early because there’s traffic ahead. If there is a change in plans, then the performance against budget report is exactly the place to highlight why you missed the mark and what you are doing about it. Footnote away! Make notations! Changing the budget just to match your performance, however, only removes accountability & obfuscates what is truly happening.