Reference no: EM133047449

Review five suggestions for using good judgment when forecasting.

Explain why each is important to an entrepreneur. Detail and explain each.

Develop realistic sales projections. Entrepreneurs often think they can accomplish more than they actually are able to, especially when it comes to forecasting future sales. When graphed, their sales projections for a new venture often resemble a hockey stick-the sales numbers are flat or rise slightly at first (like the blade of a hockey stick) and then soar upward (like a hockey stick's handle). Such projections are always suspect-only the most astonishing changes in a business or market can justify such a sudden, rocket-like performance.

Consider different scenarios. When it comes to forecasting, you should typically prepare at least three scenarios-one with an aggressive forecast for sales increases, another using more conservative assumptions, and a third with worst-case situations. This is particularly important in an environment where future demand is unclear.

Communicate with suppliers. Budget preparation is a good time to scrutinize vendor relationships. Your suppliers may be mapping out their expectations for the year as well, and you can help them do so by providing your outlook. Depending on the closeness of the relationship, you might share your budget and the possible scenarios you might face with your suppliers to see whether they can handle each level of demand.

Avoid providing too much financial information. Computer spreadsheets are extremely valuable in making projections and showing how different assumptions affect the firm's financials. But do not be tempted to overuse this tool. Instead, limit your projections to two cases: the most-likely (base) case and the break-even case. The base case should show what you realistically expect the business to do; the break-even case should show what level of sales is required to break even.

Be certain that the numbers reconcile-and not by simply plugging in a figure. All too often, entrepreneurs plug a figure into equity to make things work out. While everyone makes mistakes, that's one you want to avoid because it can result in a loss of credibility.