Projections are used to evaluate various financial alternatives, evaluate potential capital investments, predict future financial performance, and estimate entity value.
While the projections are often created by personnel in finance, other operating managers also need to be involved in order to give feedback on the accuracy of various estimates.
Typically, past performance is used to estimate future performance. While past performance is reliable in some environments, this isn’t always the case. Key variables can change quickly and optimism or pessimism may cause the projections to be inaccurate.
Therefore, it’s important to be thoughtful when past performance is used as an indicator of future performance.
When we combine the past performance with the company’s financial targets, taking into account realistic opportunities and risks, and create more than one scenario, it will increase the likelihood of obtaining information of value for effective decision making. By considering various outcomes, you will be better prepared for informed decision making, an uncertain future and also be able to identify which variables have the greatest effect on the outcome.
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