It’s better to be roughly right than exactly wrong
A financial model which forecasts into the future, by definition, contains a certain degree of uncertainty. We feed our best estimates based on the most accurate information we have at the time, into the assumptions of the model which in turn feeds our predictive forecasts. To then use those forecasts to made ridiculous statements about the future direction of the company with utter confidence and absolute precision is completely preposterous! Yet we see this happen all the time.
The output of a model is only as good as its inputs (garbage in and garbage out) and it’s reckless to use the outputs of the model without qualifying the inputs used to come up with those numbers. In the example below, it would make a lot more sense to make the statement “Based on the assumptions of our financial model, the annual profit is estimated to be around $4.5m by 2040. This means that our company is worth in the vicinity of $20.3m.”
I’ve heard people refer to the financial model with a blind faith in the output which is dangerous in my opinion. Unnecessary precision in the numbers compounds this, leading to a false sense of accuracy and making outrageous statements like the one in the image below is misleading and downright irresponsible. A financial model’s purpose is to provide a useful GUIDE for general direction, not to pretend to know the future exactly.
The next time you hear someone invoking the financial model to make a point, especially if the numbers quoted are very PRECISE, ask what assumptions were used. Was scenario analysis performed? Ask questions. Don’t be fooled by false accuracy!
