The business of forecasting business and market conditions pertain to every business and every forecaster utilizes a set of assumptions as to what those conditions may be to create the resulting forecast. The assumptions are called “empirical assumptions” and empirical assumptions are opinions so this creates considerable controversy as everyone has an opinion and your opinion is no more (or less) valuable than anyone else’s – including the opinions of people like us who are paid to make these forecasts.
One of the most important objectives business have to conquer is obtaining the capital funding that is necessary to grow their business and that requires the production of a feasibility study to determine whether or not the sponsor seeking to promote the capital investment opportunity is making reasonable claims regarding the prospects for the forecast of outcomes to be realized or not, but more importantly to the sponsor/promoter of the investment, whether or not it is likely the deployment of capital by the sponsor/promoter would be reasonably-expected to create the economic outcome the sponsor/promoter requires as a condition precedent to undertaking their business. The feasibility study is prepared by a third-party who – you guessed it – makes a series of empirical assumptions to create the feasibility study.
Our approach to this problem is to focus on the promoter/sponsor economic goals and the requirements dictated by the current investment preferences of the capital markets in terms of each other and the proposed business. The issue is whether or not the assumptions we make are reasonable and that is open to opinion. Our solution is to test he assumptions using a pro forma financial feasibility analysis to model the assumptions and see if the results would be reasonably-expected to meet the investment objectives of the sponsor/promoter and those of the capital markets. When our proprietary testing program finds deviations the system attempts to resolve them by testing different business case operating scenarios that are still within the bounds of reasonable consideration. If the assumptions still cannot be made to work then the results are a failure and the feasibility study final findings are a rejection. Where these are resolvable based upon the testing criteria the final findings are an approval subject to the cited conditions. This involves a high degree of cost analysis testing that is the real magic because the real issue is the assumed market area the business is expected to address. If the feasibility analysis test is a failure at the smallest assumed geographical area (the “Best Case Area”), then it moves on to a second or even third area, but requires the costs of marketing and sales to address those larger areas of potential consumers, so the adjustment of market area boundaries is no panacea.
The best case? The best case will always be the smallest area and not your expected area, the lowest cost of marketing and sales, not the expected cost of marketing and sales, and maybe that is a better way forward.
What do you think?