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How accurate are your financial projections? by Cynthia Bassett Hartwig, CPA

Here are some methods you can use to evaluate the precision of your financial forecasts:

1.     Comparison with Previous Year’s Data: Review the results from the last year and compare them with your current projections. Consider any significant differences and whether they can be justified by changes in the market or business operations.

2.     Benchmark Against Recent Trends: Look at the patterns in your company’s recent performance. Are revenues growing or declining? Use these trends as a benchmark to assess whether your projections are in line with these patterns.

3.     Utilize Historical Extrapolation: Take the data from the recent past and extend it into the future, adjusting for any known changes or expected trends. This can give you a baseline to see if your projections are realistic based on historical growth rates or changes.

4.     Scrutinize Assumptions and Risks: Examine the underlying assumptions you’ve made in your projections. Are they based on solid data or optimistic guesses? Also, consider the risks involved and how they might impact your projections if they materialize.

5.     Monitor Forecasts Versus Actuals: Keep track of how your actual numbers stack up against the forecasts over time. This tracking will not only show you where your forecasts may be off but also help you refine your prediction methods for more accurate future forecasts.

By employing these methods, you can gain a clearer picture of how accurate your financial projections are and where adjustments may be needed. It’s a continuous process of comparison, analysis, and refinement to ensure your business planning remains on solid footing.

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