Why Do Most Financial Projections Fail?

Do you know the number one reason most financial projections fail? It is because sales are over estimated!

Why Do Most Financial Projections Fail?

This time of year we are busy working with clients preparing projections for the next year. What we find is it is very difficult for clients to do an accurate financial statement projection if they can’t project sales. Working with companies to project the top line of the financial projections is the hardest part. Once you have the top line the rest of the projections fall into place based on historical numbers.

How To Project Sales

So how do you project sales? We generally start off with last year’s sales numbers. We ask ourselves do we think they are going to increase or decrease? If so, then by how much? We determine by product line how much sales we need to be profitable. We look at recent sales trends and review them with the sales team. Finally, we prepare a backlog schedule with identified sales on a monthly basis. The greater the backlog identified, the greater the accuracy!

When projecting sales it is important to be reasonable. You should strive to “under promise and over deliver”. Often the management teams strives to set the bar high for goal setting purposes. You don’t want to shoot yourself in the foot with your banker if you miss you projections by a wide margin! It is better to come in a little above your projections rather than quite a ways below your number.

What has been your experience in projecting sales?

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

most financial projections fail

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2 Responses to Why Do Most Financial Projections Fail?

  1. Thomas Kirsschner November 25, 2012 at 6:16 am #

    My experience with sales projections is a bit different as we work very closesly together with sales and in Finance we have a very good knowledge of what I would call a transfunctional know-how: We know the customers, the market environments, economic outlooks, stock levels and sell out of the customers. And we use a so called Management assessment regarding sales: It is a top down adjustment in the sole responsibility of the Finance area where Finance corrects the sales projections to the levels they feel comfortable (by the way this can also be up, like when coming out of a crisis) and these are the basis for the projections which get disclosed to 3rd parties.

  2. John Arthur November 25, 2012 at 11:24 am #

    Jim, You are right about following trends and backlogs. I have also found it helpful to include published industry reports. There is often a close correlation between your company’s performance and industry trends that can be tracked. My experience has been that the most difficult element is protecting against the optimistic executives who have probably justified projects, raises and bonuses based on their own forecasts or have projected higher sales to please a parent company or Board of Directors. My experience has taught me to anticipate these optimistic projections and initiate meetings where facts are presented and the team is encouraged to be realistic. A forecast that misses a target with higher sales than reality will create a frantic cost cutting environment, a forecast that is low will create a need to catch up with necessary resources or even cause the company to miss an opportunity. These reality meetings have proven to be effective is preparing a realistic forecast.

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