We generally request management forecasts to assist us in preparing a valuation of a business. The forecast helps us gain a better understanding of the expected trends of the business. For those businesses that are in start-up mode or going through some significant changes, we would ideally like to have a two or three year forecast. The difficulty with forecasts is that management is making assumptions that may or may not come true. Although the future may not and likely will not match the forecast, it can still be useful for management to put their minds to some important assumptions such as ‘how will the business generate revenues’, ‘how many widgets will we sell’, ‘what expenses will we incur’.
Some of the common issues we sometimes see with forecasting:
- Revenue growth that resembles a hockey stick…in other words very optimistic sales expectations
- Unrealistic margin expectations
- Outdated forecasts (e.g. six months into the forecasted period and actual results are nowhere near expected results)
- Not adequately considering the costs required to generate revenue growth (e.g. advertising or additional sales staff)
- Industry research does not support the forecast
We encourage you to consider these issues when preparing your forecast. The result may be a very useful valuation tool as well as a management tool that can be used to help steer your organization to profitable growth.