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All too often in the management forecasts and budgets we are presented, we observe projections to be overly optimistic. Often this is the case when a company is purchased by a new owner. Given that the new owner of the company expects to see great potential in their newly purchased business, the added optimism is understandable. However, owners and management should still reflect on how the company has performed in the past.
For example, if a company is purchased with the purpose of adding synergies to an already existing company, we would expect to see a slight reduction in costs in the new projections. Some cost reductions may be in wages (i.e., less staff is required as the old company’s staff can take on the additional work of the new company) or in general office expenses. However, sometimes we see a company’s projections exhibit a “hockey stick” in their revenue growth and massive cost reductions, ultimately insinuating massive profits and unrealistic cash flows in the operations.
Some points management and business owners should consider when preparing forecasts are:
Careful determination of a forecast benefits business owners and management by allowing them to focus on developing strategic goals to grow their business. If there is a lack of thought and effort putting together the forecast, it will reflect in the final product, which may end up being a simple list of numbers that may not be useful in the company’s long-term plan.