Question

Financial Projections & Explaining Uncertainties

The one sure thing about financial projections is that they will be wrong—perhaps by only a little, or perhaps by a lot. But managers must still make decisions. In fact, making no decision is really a type of decision—a choice to do nothing.

In your initial post, answer this question: How can you explain the uncertainties in financial projections without scaring your audience?

To avoid scaring your audience, uncertainties in financial projections, including forward-looking statements, can be explained by 1) identifying them as projections, 2) defining what projections are, 3) stating what the audience should or should not do with the projections, 4) disclosing that there is uncertainty, and 5) describing known risks, their impacts and mitigation strategies. First, using Nordstrom Inc.’s Annual Report as an example of a projection, the firm identifies that the contents of the report represent forward-looking statements (Nordstrom Inc., 2019). Second, the firm defines that its projections are estimates derived from “management beliefs and assumptions” as well as “information available” at the time the projection was made; the projections contain “known and unknown risks, uncertainties, and other factors which may cause” differences between the projections and results (Nordstrom Inc., 2019, p 4, para 1). Third, Nordstrom states that the audience interpreting the projections should do so with a view that results may differ from the projections; the firm states that the audience should not fully rely on the projections (Nordstrom Inc., 2019). Fourth, the firm discloses that there is uncertainty regarding the projections (Nordstrom Inc., 2019). And fifth, Nordstrom describes its known risks, including the potential impacts of each risk and mitigation strategies, to provide transparency into events that could impact how the projections play out in the future as well as how the firm can take action to reduce the chances of a risk being triggered (Nordstrom Inc., 2019).

Providing transparency into uncertainty is critical to enabling an audience to understand the uncertainty behind financial projections without frightening them. Implementing mechanisms for updating projections can also be important so that the audience gains confidence in the firm’s ability to see either problems or opportunities as early as possible. This can occur through frequent, rolling forecasts that are automated and are extended to the audience through self-service (Hull, 2014). Beyond these details, general market performance can influence the audience’s risk response; an audience may be less scared by uncertainty when the economy is strong (Grable, Lytton, & O’Neill, 2004). This also applies to emotional state; an audience in a good mood is likely to be less scared of uncertainty than one that is in a bad mood (Grable, Lytton, & O’Neill, 2004). Pragmatic transparency, as described in the Nordstrom Inc. Annual Report, ongoing visibility into changes, and ‘external’ factors - the state of the economy and audience emotions – can collectively impact how an audience responds to uncertainty in financial projections.

For Chegg: constructively critique my explanations. Support your initial comment and response with sound reasoning and relevant examples.

Answer 1

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Ans: There are always an uncertainty about the financial projection, there could be various reasons behind this, but one must understand that though it can not completely be avoided, one can always think of having a plan to overcome this variation, hence one should always explain to their audience regarding financial projection uncertainties by telling them what all the techniques they used to get the projections and what can be expected variations on it and also what they would be doing as a course of action once they see that deviation is occured, there should always be an explanatery note about permissible variation in financial projection numbers. They also need to tell the audience that what are the action they would be taking to mitigate this variation and it will not impact them individually, thus it should be explained in this way so that they will not be scaring upon hearing the uncertainty in financial projections.

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