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Companies all around the world are focused on quarterly as well as annual results. As soon as these results are announced, the financial markets give some sort of reaction. If the results are good, the stock prices rise. If not, stock prices tend to fall.
However, in either case, the stock price is linked to the latest earnings numbers which are released by any company. This is the reason why companies spend many hours collating these results and trying to project them as positive news to the investors.
This is understandable to some extent. Investors are right when it comes to obsessing about past information. However, the extreme focus which company executives lay on these results is not really understandable.
Instead of focusing on the past, company executives would be better off if they focused on the future, i.e. the forecasts. These executives should know that the valuation of any company is actually driven by the discounted value of cash flows. They should also be aware that forecast statements are the roadmap to making projected cash-flows a reality.
Some companies do give out revenue guidance for the forthcoming year along with their annual reports. However, the focus on the future is much less as compared to the focus on the past.
In this article, we will explore how the forecast statement can be strengthened so that it provides more details and better insights to prospective investors.
Forecasts are usually prepared for a 12 month period at most companies. However, it should ideally be prepared for a time duration between three to five years. This is because a longer term period captures the strategic shifts better.
When forecasts are prepared for a 12 month period, the values are derived by updating the previous values. However, in most cases, the future periods are not like past periods. When companies look at 12 month periods, they tend to miss the wood for the trees. This can be avoided by increasing the forecast period.
The bottom line is that forecasting is as important (if not more important) as the quarterly/annual results. However, since they are not a mandatory financial statement, considerably less time is devoted to their preparation. This needs to change since forecasts can also be used strategically.
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