Like Hercule Poirot you should be on the lookout for ulterior motivation. Was the forecast prepared with one eye to selling the business (usually inflated) or getting a valuation for a matrimonial dispute (this often produces a low valuation if the business owner is the defendant). Or perhaps it was prepared for bank funding – in which case be sure the bank will scrutinise and sensitise the forecast.
If the business has historically been poor at predicting its results which should it be different now?
The pattern of growth or margins look odd
It’s always possible to benchmark the figures against public companies or other data. If the business producing the forecasts has wildly different growth rates, or margins one needs a good explanation as to why that should be.
Forecasts prepared in isolation by the finance director
The CFO or FD in the business needs to canvas inputs from the key mangers in the business before he or she can produce anything meaningful.
The forecast is based on a huge assumption
If there’s one or two huge assumptions that drive the forecast, such as being able to raise millions of pounds of equity finance, or winning a significant new contract then you should consider what happens if those assumptions don’t prove realistic.
Forecasts conjured out of thin air
Of course if there are no, or few, supporting assumptions to check out then the forecast will lack credibility. I recently valued an early stage technology company where it quickly became clear that the forecasts beyond the first twelve months were just round figure guesses – so I had to discount them altogether in my appraisal.
No balance sheet
I do sometimes see forecasts based on a profit and loss account and some cash flow assumptions. Without a balance sheet a vital logic check is missing.