Giving Meaning to Projections

Giving Meaning to Projections

By Karl Kern, Founder/President, Kern Analytics LLC

Making projections is one part of an FP&A practitioner’s work.  The purpose of projections is to establish expectations on outcomes.  How can an FP&A practitioner give meaning to projections?

An FP&A practitioner can give meaning to income projections.  When working with entrepreneurs I emphasize a quote from an angel investor: “I don’t care what your idea is, I want to know how I’m going to make money.”  Answering the angel investor’s question requires entrepreneurs to go beyond numbers when raising money.  One way to go beyond numbers is through descriptive general ledger accounts like Sustainable Materials, LinkedIn Advertising, and Blockchain Training.  Another way to go beyond numbers is through executive summaries that describe how startups will create, promote, and support what is sold.  General ledgers and executive summaries are not the answer but an answer for giving meaning to income projections.  Giving meaning to income projections only can be accomplished when words are used with numbers in a way to establish a story that readers consider credible.

An FP&A practitioner can give meaning to cash flow projections.  When helping a startup raise money I found an extremely optimistic assumption about inventory; the assumption was the startup would sell its products on average within 4 days.  Immediately I asked questions about this assumption and learned about their production and selling processes.  What I learned about these processes was expressed in words rather than numbers.  The words used to express these processes helped me not only understand but also highlight the assumption.  Highlighting the assumption is important because it establishes a story about cash flow which in this case is cash flow will stand out due to effective inventory management.  What one can take away is cash flow is numbers supported by words and words will give meaning to cash flow projections in a way to determine the projections’ usefulness.

An FP&A practitioner can give meaning to earnings per share (EPS) projections.   I use EPS in this article because EPS is used by business networks like Bloomberg, CNBC, and Fox Business to educate their audience about quarterly results provided by publicly traded companies.  Since EPS is used by business networks an FP&A practitioner has a resource for giving meaning to these projections.  How can an FP&A practitioner use this resource?   Business networks expand their presentation of EPS by telling stories about sales and/or expenses.  The stories in large part are presented in a way that simplifies an understanding of what has happened as well as what will happen.  As a result an FP&A practitioner can use content from these stories to enhance the quality of EPS projections in order to make them useful for stakeholders.

Projections are an important part of our lives because we want to know what will happen in the future.  Numbers are not enough to help people know about tomorrow.  As a result an FP&A practitioner should look to add stories to the numbers in order to give meaning to projections.