It is easy to let financial projections take on a magical power. “Lets wait and see the financials” – I’m guilty of that line myself. “The Numbers” that are conjured up are eagerly seized on as a lifeline promising precision in an uncertain world.
Awareness of this tendency is the first step in returning “The Numbers” to their rightful influence. At core, financial projections are a set of assumptions. The risk is that Excel spreadsheets make it very easy to create financial projections that show a very attractive financial opportunity. Every competent middle manager will shape a proposal before bringing it to the CEO to maximise the chance of a “yes”, with investment hurdle rates met and backup to defend every individual assumption.
Rather than get lost in individual assumptions, the CEO has to force strategic thinking by asking the question “why?” As nature abhors a vacuum, markets abhor attractive profits. This opportunity will only be different because of the competitive edge the company brings to the table. The CEO can constructively focus their probing here – What is the edge? How can we deploy it most effectively? How do we know it matters? What do we have to assume for this edge to overcome competitors? How do we prove this assumption quickly and cheaply?
If these questions can be answered clearly and credibly, it is time to bring out the financial model.