A financial projection is a prediction of potential future performances. The exercise entails structured thinking that enables managers to experiment on uncertainties referred to as “what ifs” to arrive at informed assumptions on future outcomes. Therefore, business financial projections are characterized by high-level risk-taking and uncertainties. Explaining the uncertainties to shareholders can be a daunting task.
Logical explanations of financial projections uncertainties dispel fear out of the audience. Logic removes superstition from forecasting and instills a solid plan towards the attainment of the set projections. A logical account of all the opportunities and risks in the projections instills confidence and trust in the audience (Grable et al., 2004). Logical presentations define the cone of uncertainty clearly. The audience is able to read through the intuitions and judgments of the forecaster and develop trust in the process, however risky the projections are. Logical explanations expand the understanding by detailing overlooked opportunities and analyzing unclear assumptions.
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Dispersing fear from the audience requires using forward-looking statements, explaining what projections are, disclosing the uncertainties, explaining risks, impacts of the risks, and control measures to the risks. A financial projection report from Nordstrom inc. (2020) states that the projections are estimates based on management intuitions, data available, and assumptions and that there are known and unknown risks and hence the results may deviate from the forecasts. Further, the report states that the audience should only use the estimates with a provision for future deviations, and thus, no one should rely on the figures fully. Additionally, the projection report discloses uncertainties and the known risks, and corresponding mitigation measures. The transparency in reporting helps the shareholders comprehend the uncertainty behind the projections without instilling fear.
Communicating periodic updating and adjustments mechanisms can be reassuring to the audience (Grable et al., 2004). The triggers to these adjustments include economic performance and unforeseen tragedies such as the Covid 19 pandemic that interrupted business processes. Preparing the audience for these external factors shows pragmatic transparency and enables the audience to respond effectively to uncertainties.
References
Grable, J., Lytton, R., & O'Neill, B. (2004). Projection bias and financial risk tolerance. The Journal of Behavioral Finance , 5 (3), 142-147.
Nordstrom. (2020). Nordstrom Reports Fourth Quarter and Fiscal 2019 Earnings
