How can you determine the appropriate level of detail for a financial projection?

1 Purpose and audience

The first thing to consider is the purpose and audience of your financial projection. Why are you creating it and who will use it? Different purposes and audiences may require different levels of detail. For example, if you are seeking funding from investors, lenders, or grantors, you may need to provide more detailed and realistic projections than if you are using them for internal management or strategic planning. Similarly, if you are presenting your projection to a technical or financial audience, you may need to include more data and calculations than if you are communicating with a general or non-financial audience.

2 Time horizon and frequency

The second thing to consider is the time horizon and frequency of your financial projection. How far into the future are you projecting and how often will you update it? Generally, the longer the time horizon, the less detail you need, because the uncertainty and variability increase over time. For example, if you are projecting for the next five years, you may only need to include annual figures, rather than monthly or quarterly ones. On the other hand, the higher the frequency, the more detail you need, because you need to track and monitor the changes and trends more closely. For example, if you are updating your projection every month, you may need to include monthly cash flow statements, rather than annual ones.

3 Key drivers and assumptions

The third thing to consider is the key drivers and assumptions of your financial projection. What are the main factors that affect your revenue and expenses, and what are the values and ranges that you are using for them? The key drivers and assumptions should be based on reliable data, research, and analysis, and they should be clearly stated and explained in your projection. The level of detail for your key drivers and assumptions should reflect their importance and impact on your projection. For example, if your revenue depends on the number of customers, the average price, and the conversion rate, you may need to include these variables in your projection, rather than just the total revenue.

4 Sensitivity and scenario analysis

The fourth thing to consider is the sensitivity and scenario analysis of your financial projection. How sensitive is your projection to changes in your key drivers and assumptions, and what are the possible scenarios that could occur in the future? Sensitivity and scenario analysis can help you test the robustness and validity of your projection, and identify the risks and opportunities that you may face. The level of detail for your sensitivity and scenario analysis should reflect the uncertainty and variability of your projection. For example, if your projection is based on a single set of assumptions, you may need to include a sensitivity analysis that shows how your projection changes when you vary one or more of the assumptions. If your projection is based on multiple sets of assumptions, you may need to include a scenario analysis that shows how your projection changes when you apply different combinations of the assumptions.

5 Format and presentation

The fifth thing to consider is the format and presentation of your financial projection. How will you display and communicate your projection to your audience? The format and presentation of your financial projection should be clear, concise, and consistent, and they should highlight the main points and messages that you want to convey. The level of detail for your format and presentation should reflect the purpose and audience of your projection. For example, if you are creating a financial projection for a business plan, you may need to include a summary table, a graph, and a narrative that explain your projection. If you are creating a financial projection for a financial model, you may need to include a spreadsheet, a formula, and a code that calculate your projection.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?