Forecasting Guidelines

Folks,

Today I want to share some guidelines regarding Forecasting Financials.

Rule#1: Be Consistent with past performance & avoid strong spikes at the beginning of the forecast period.

The first rule you should remember is that a good forecast follows the historical performance and current industry outlook. If predicted financials look rosy to be true, they probably are, reexamine your assumptions & try to avoid the so-called Hockey-Stick Effect, consisting of spikes in the forecast period.

If you present a model that contains the hockey-stick effect, experienced executives will immediately raise their eyebrows & will question the assumptions you have made, presuming they are overly aggressive.

Rule#2: Carefully Study the analysis of industry position leaders & Plan Accordingly

Industry outlook is important. Make Sure that the scenarios in your model reflect expected industry developments & trends. Study expert opinions & analyses from industry-dedicated analysts. Try to incorporate their guidelines in your financial model rationally.

Rule#3: Take a closer look at the numbers & see if there is something unusual  

Once your model is ready, play with numbers to evaluate the possible change in results with changing numbers. Point out any assumption which can be challenged & try to build it on some rational basis.

Make Sure that assumptions are easily defensible & logical. 

Rule#4: Always Consider the Current Stage of development of the Company

While forecasting Financial Statements, always keep in mind the current state of development of the Company based on the Industry life cycle.

Things work differently while forecasting for startups, Mature, or growing businesses. For Example, for a startup, it's normal to burn cash in the first one or two years & then reach the breakeven level in years to come. Cash Burning for a mature company for more than one year may be alarming. Moreover, Mature companies show slow growth rates than growing companies.

By following the above Guidelines, You may make an error-free Financial Model.

Some of the subscribers requested a training session on Financial Modeling. I am considering to start a series of Newsletters in which we will work to construct a Complete Financial Model from Scratch.

What is your opinion on this matter?

Let's Learn & grow together.

Your LinkedIn Mentor,

Mohsin Idrees