The fallacy of misplaced precision


One of the most common problems I see in founders’ financial projections is what I call the fallacy of misplaced precision: revenue in year one, for example, projected to be $1,457,295. There is no way even a mature company would be that precise in forecasting down to the dollar.  Perhaps because many founders are engineers who tend to be overly precise, but more likely it’s a result of using a spreadsheet and simply taking a percentage of an existing market (“if we just get .1% of all the drivers in China we’ll be cash flow positive in year one!”).

So here’s what I suggest in trying to predict the future with numbers

  1. Use round numbers, like $1,500,000
  2. Use a range, like $1,300,000 to $1,700,000
  3. Provide best case, worst case, and probable case scenarios
  4. Provide numbers, but with degrees of accuracy, +/-  X%, where X is 10% to 20%

Where you can perhaps be more precise in your forecasting is in unit price, especially if you are in a competitive market, which will tend to set a range for you. But pricing is an art unto itself and worth another post.

Keep in mind that as in a previous post, the most important part of your financial projections are not the numbers, but the assumptions behind them. 

If you want to get past an investor’s sniff test don’t commit the fallacy of misplaced precision – it’s a dead giveaway that you have generated your projections top down from a spreadsheet, rather than built them bottoms up from carefully forecasting sales by channel.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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