What makes up and how does one develop a 
great financial forecast for a smaller, privately held company?
Should the forecast be “realistic” – i.e. feel “doable” and in line with past results or…
…should it be “aspirational,” not hot air by any means but also representative of goals that makes managers feel more than a little anxious as to their ability to attain them?
What is the actual “projections-making” process? Is Microsoft Excel the only “tool” option?
How much industry, market, and competitive research should be done to benchmark our forecast against relevant comparables?
And perhaps most poignantly, if there is not a regulatory or shareholder requirement, why even do it?
Answers to these questions and great way to think about the process and purpose of financial projections can be had via what I call the “HMCBW” approach - examining the Historical data, the Market conditions, the Competition, the “Bottom-Up” assumptions, and finally and most importantly what management Wants.
It looks like this:
#5. Let History Be Our Guide. The first thing to do in assembling projections is to evaluate what was, and was not, financially accomplished by the business in the past.
While the previous period (most usually the previous year) is usually most indicative, there is also great wisdom to be had in looking back to more chronologically distant periods as well.
This is especially important in our now seemingly permanent “uneven” economic environment, driving the need to defend our assumptions in various (bullish to bearish) future market and competitive scenarios.
#4. How Big is My Market? Undertaking a formal and comprehensive study of a business’ industry, market, and competition usually leads to one of two results - either the target market is much smaller and less lucrative than surmised or…
…it is defined so imprecisely and broadly as to uncover faulty strategic thinking / an unsound business model.
Either outcome, both painful, naturally lead to the kind of hard introspection and business model re-positioning upon which solid financial projections (and ultimate business success!) depend.
#3. How is the Competition Doing? We live in this most amazing time where our competitors - as part and parcel of their sales and marketing strategies - just post to the Net their business models for all to see.
Additionally, amazing tools like CapIQ, Hoovers, IBISWorld, LexusNexis, Statista, and Follow.net give us inexpensive access to often shockingly accurate financial data (even profits!) on even the smallest and most secretive of private companies.
Utilizing this data as benchmarks for our projections is incredibly powerful. We do not need to be wed to how our competitors do it, but we would be foolhardy to not study and learn from them.
#2. Bottom-up! The business analytics revolution - as represented by the dozens of SaaS business process applications and productivity tools (with their incredible reporting functionality) - allows for the assembly of Bottom-Up financial projections with an “actual data” specificity like never before.
This might look like building revenue projections based on the conversion ratios of web traffic to inquiries (phone, e-mail, text, etc.) to proposals, to sales, to retention, to ongoing revenue.
These bottom-up models, in addition to being powerfully predictive, are also highly insightful as to the performance of various aspects of an enterprise - its marketing, its salespeople, the quality and efficacy of its products and services, etc.
#1. What Does Management Want? The fuzziest - but also by far the most important factor when developing projections is just asking what management and ownership want to see happen.
What kind of revenue and profit projections will inspire and embolden? Will force to the forefront the need for breakthrough business model thinking and doing?
Answering these “inspirational” questions is fundamentally important in assembling projections that serve the objectives of managers and owners, and not the other way around.
Historicals. Market size. Comparables. Bottom Up. Want.
Follow this five step model in building your growth, revenue, and profit projections and watch the Manna from Heaven flow!
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