A market projection is an important component of a business plan. It is necessary for anyone who wishes to start a business or anyone who is about to seek financing for a business. A market projection states the future of the market or the industry to which the business belongs. Its role is to prove whether the business has a bright potential for profit and growth in the future.
Projections are often necessary when businesses need to attract investors as these can convince the potential investors of the expected success of the business. Business owners and managers also use market projections to guide them in making business decisions.
There are many kinds of financial projections; some forecast sales, some forecast final profit, while some forecasts the stock market. Since there is a need to predict the market, certain principles, theories, and established models have to be taken into consideration. When it comes to stock market forecasting, one example of the common theories that can be used to analyze the market and create projections is the Dow Theory. The period covered by market projection also differ; some create 10-year forecasts, while others make up to 30-year projections; this would depend on the needs of the business.
Making financial projections can be a challenging and intimidating process that requires some mathematical skill and a lot of knowledge about the business, the industry, and the market. Without such knowledge, it would be impossible to create projections about the future of the business.
In making projections, one would also need to make estimates, which can be described as ‘educated guesses’. Sales estimates, for one thing, need to be based on several key factors, namely the number of potential customers in a demographic region and your marketing strategy. Other key factors that will affect the project include interest rates, short interest ratio, index prices, money supply, mutual fund flows, and many others.
There are certain risks involved in making market forecasts, especially if a forecast fails to be accurate or fails to take some key factors into consideration. For one thing, developing bigger expectations about the valuation of a business can lead to wrong business decisions. Thus, although a necessary part of any business, making projections should be conducted carefully and with a lot of knowledge and analysis to back them up. Although risks cannot be avoided, a near accurate market projection can actually help you avoid future risks.