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When preparing financial projections, be conscious of the pitfalls and
dangers listed in the table below. These can arise as the result of a
lack of foresight or insight, or because of excessive optimism. As they
can lead to underestimation of the resources required to develop a business
with potentially disastrous consequences, it can be counterproductive
to overstate its potential.
| Financial Planning Traps |
- Using financial forecasting as a substitute for business planning.
- Ignoring historic trends or performances at company, sectoral
and national levels.
- Overstating market shares and growth, sales forecasts, and
profit levels.
- Giving insufficient consideration to working
capital requirements.
- Underestimating costs and delays likely to be encountered.
- Disregarding industry performance norms and competitors' responses.
- Breaching generally-accepted financial guide lines and ratios.
- Making unduly optimistic assumptions about the availability
of loans, trade credit, grants, equity etc.
- Seeking spurious accuracy while failing to recognize matters
of strategic importance.
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Realistic views should always be taken of a business's prospects, prospective
profits, funding requirements etc. There is often merit in compiling "worst"
case projections to complement "most likely" or "best" forecasts. In practice,
the realization of financial projections, especially for a new business
without any trading history, might easily take twice as long and cost
twice as much as expected. Remember that it is much less painful to deal
with a flaw in a business at the planning stage, than later on when commitments
have been made and the business has started trading.
Note: Our software planners - Exl-Plan
and Cashflow Plan -
incorporate comprehensive facilities for doing sensitivity analysis and
conducting what-ifs (using their Quik-Plan and sensitivity
tools and by changing individual values).
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