When the company or enterprise draws up its budget it usually concentrates on items of expenditure. At the same time the less overseen revenue side of the budget stays deficiently detailed and motivated. Here we will speak about such thing as financial projections and some mistakes which can take place in it.
The main difference financial projections and planning is that it is usually projected such activities on which the company can’t influence in full. These are sales volume, risks and actions of competitors. You plan things that are fully controlled, for example, spending. The main aim of projections is to get the ability to estimate the work of company as “successful” or “unsuccessful” not on the basis of the available activities (profits, markets, returns on investment) but on the basis of activities that potentially could be.
Methods of financial projections can be different and their choice depends on the abilities of analyst. These can be both complex mathematical models and intuitive conclusions. The main thing that the final result of the use of such methods should describe the real situation so exactly as it’s possible.
Now we account the activities which can influence on the financial projections directly.
It’s necessary to define future index of the sales volume of the company in natural and money terms in order to project the revenue. Also it’s necessary to understand how they can change in dependence of internal and external conditions.
Decomposition of factors
The index of the sales volume of the company is variegated because it depends from many factors (demographic situation in this region, the state of the industrial sectors in which goods-substitutes are produced and so on) which can change in future. So in order to take a decision connected with the future sales volume it’s necessary to determine all factors which can influence ion this projection. If the company is not a monopolist than such factors should include the part of the market which this company accounts to take in that period of time.
Projection of factors
Now it’s necessary to make projections of relevant factors. The final result of this stage should be the border (pessimistic and optimistic) intents of projections of all factors which can influence on the sales volume. Most of companies estimate the third variant (the most possible) also which usually lays between two border intents.
So the projection intents of revenue for every year are got as aresult of analyses of relevant factors for every variant of development.
Of course this is not all that is connected with financial projections but this can give you the picture of how it is made.
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