A former boss of mine often repeated a very interesting expression: “informed guess” or as the Anglo-Saxons say, and you have certainly heard: “educated guess”.
In the context of Valuation Business Modelling, whether to determine the value of an asset or company, or to carry out a Business Plan for a new Project, we are often called upon to establish models for predicting the future. These forecasts are made based on the best baseline information that we can obtain.
In the last 3 years, we have gone through the exercise of financially modelling a handful of hotel projects. Something we always come across is a reasonable difference between the original assumptions that the project promoters bring us and what ends up in the Business Plan. For example, in relation to construction investments, it is very common for the actual time to be much higher than initially estimated (I would say that a 1 to 2.5 rule is common). In investment values, we also often find the need to increase the initially estimated amounts by 50%.
I believe this happens for a simple reason. Many project decision makers/promoters think that it is possible to define investment amounts only based on benchmarks of dubious quality. For our part, we believe it is essential to know what we want and to ask professional suppliers for proposals or estimates. The difference is frequently enormous.
In this context, it seems to me unbelievable and sincerely not credible that promoters who propose to carry out projects of millions do not understand the need to make estimates with a minimum of detail, rigor, and professionalism.
Even my 7-year-old daughter understands that it is better to spend 4 or 5 thousand euros to make a Business Plan as it should be, than to spend 4 or 5 million euros badly spent, because we didn’t want to make a Business Plan.
Or as the Anglo-Saxons say:
“Don’t be penny wise pound foolish”.
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