Financial Management

21Long-Term Projections

In this chapter, we will focus on developing projections over the long term. We will build on the practices and techniques introduced in Chapter 19, “Business Projections and Plans—Introduction and Best Practices.” Long-term projections (LTPs) are required to evaluate new products, acquisitions, capital investments, and strategic plans. In simpler times, LTPs could be easily developed by extrapolating historical performance trends or extending static business models. Over the past 30 years, factors such as globalization, technology developments, geopolitical events, demographics, and economic factors have significantly impacted markets and businesses.

Developing projections of performance over an extended period introduces some unique challenges that require a robust process to overcome. Uncertainty about the future should imply that most LTPs should include identification, testing, and evaluation of underlying assumptions and multiple scenarios.

UNIQUE CHALLENGES IN ESTIMATING LONG-TERM PERFORMANCE

Longer Forecast Horizon

LTPs will have an extended time horizon, ranging from two to five or more years. The methods and considerations used for short- to mid-term projections are usually not well suited to LTPs. There should be less emphasis on performance details and more understanding of strategic issues, market forces, and long-term performance drivers.

Greater Uncertainty

The longer the horizon of our plan or projections, the greater the ...