One of the main functions that I do as a CFO is to create financial projections. Projecting the performance of a company can be an art and a science. I take pride in putting together numbers that are realistic and achievable. Over the years, here are some areas where I have seen people go sideways in the process.
- Putting out an unrealistic number because they think someone wants to see that number. (“The VC expects us to get to $500M by year 5”)
- Not having a foundation of financial building blocks to project (if you only have 2 months of customer acquisition costs you do not have a good foundation to create a projection)
- Assuming that growth metrics will stay consistent (as you grow there are things that get easier or harder, but rarely do things stay the same)
- Not believing that it is achievable – (If the management team does not believe that a projection can be achieved then it will never happen)
Here is how I approach creating a financial projection.
- Prepare a realistic forecast for the remainder of the year as my starting point.
- Outline operational growth strategies.
- Create annual growth expectations by product line and sales channel.
- Outline current Key Performance Indicators and project along with the financial projections.
- Once projection is complete do a final review with leadership to ensure buy in.