I wrote a post recently on projections and why I don't like or use them when valuing a company. If you are a regular reader you know my disdain for using DCF as an acquisition valuation method, and projections are the heart of every DCF. Does that mean you shouldn't have or use financial projections? Not necessarily.
When I'm looking to buy a company, I like to see past budgets and variance reports. Show me the stuff put together by the line managers, sales managers and controllers; not the stuff constructed by your investment bankers. If you're selling your company today, all I need to see is the operating budget on a monthly basis for the rest of this year. I don't need to see a 30-sheet model detailing your financial future through 2011. I create my own projections for targets and usually assume revenue goes down and integration costs outweigh synergies for the first year or two.
What I really find helpful is when companies document and memorialize their budgets and variance. Here's how - when you create your company's operating budget for next year, document the detailed input from the various managers who created it. Then you and your CFO should certify the budget with its assumptions by having it notarized. At the end of the first quarter in your budget cycle, using your variance report, write a MD&A. Instead of just comparing past results, also compare the most recent quarter's results to your budget for that quarter. Go into great detail as to why you hit or missed your numbers. Again, certify the variance report and MD&A by notarize it. Do this every quarter. Showing me several years of this kind of information is not only intelligence vs. data, but also gives me some insight into your managers' abilities.