Should financial projections be optimistic or pessimistic?

If the projections are to be used for the purposes of internal budgeting then it can be demoralising for managers if the numbers are unachievable.

In this instance a realistic approach should be adopted to challenge and motivate those responsible for delivering sales or cutting costs.

When looking to raise finance, the numbers presented to the funder should be justifiable in terms of the goals set whilst bearing in mind that the lender may often request a sensitised version that lowers projected performance.

In this instance an optimistic version is more appropriate provided that the underlying assumptions can be backed up under scrutiny.

Making your financial projections flexible

If you’re not sure how to weight your financial projections, it can be very useful to make them flexible by including input boxes for major assumptions.

By doing this, your projections can be easily changed rather than having to overwrite an entire plan for a change in assumption.

Key areas that are often flexed in financial projections include the following:

  • Turnover levels
  • Debtor collection days
  • Creditor payment terms
  • Stock days
  • Gross margins
  • Year on year growth and cost inflation

If you’re not sure how to layout your financial projections, download our free template below.

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