Financial Forecast vs. Projection: 3 Essential Differences to Know

Financial Forecast vs. Projection In a Nutshell: Projections outline financial outcomes based on what might possibly happen, whereas forecasts describe financial outcomes based on what you expect actually will happen, given current conditions, plans, and intentions.

Even among seasoned financial professionals, the terms “financial forecast” and “financial projection” are often used interchangeably. There are, however, some subtle but very important differences between the two expressions. For some insight into those nuances, it’s helpful to begin with the definitions established by the American Institute of Certified Public Accountants (AICPA):

The AICPA defines both terms as “prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows.” From here, though, the definitions, as well as the implications of these two terms, begin to diverge.

What is a Financial Forecast?

A financial forecast is a forward-looking analysis that predicts future financial outcomes based on current data, trends, and management assumptions. It provides an estimate of expected revenues, expenses, and cash flows over a specific period, reflecting what is likely to happen given the existing conditions and strategic plans. Most often used by investors and stakeholders, forecasts are used for decision-making and planningmeaning they are updated regularly to reflect changing market conditions.

What is a Financial Projection?

A financial projection is a hypothetical analysis that outlines potential financial outcomes based on various “what-if” situations. Unlike forecasts, projections are less about predicting likely outcomes and more about evaluating different strategic options or possible future events. Often used for internal planning and strategy development, projections help businesses assess the impact of decisions, such as entering new markets or launching new products.

Financial Forecasting vs. Projections

Simply put, the main difference between financial forecasts and projections is that projections outline financial outcomes based on what might possibly happen (in theory), whereas forecasts describe financial outcomes based on what you expect actually will happen given current conditions, plans, and intentions. The method you use has powerful implications for the audience that uses it, as well as the types of decisions that are affected by it.

Examples of Financial Projections and Forecasts

Let’s consider a few examples. Imagine that the CEO of your distribution company asks for an analysis of what might happen if the firm were to expand its market coverage to a new country or region. To respond to their request, you would likely need to ascertain the number of new locations, the expected volume of increased revenue, potential staffing requirements, how much capital investment might be needed, as well as any other related revenue and operating expenses. Due to the fact that this is a theoretical scenario where you are exploring the possibility of something happening, your resulting financial analysis would be deemed a projection.

Now consider a slightly different situation, in which the company has already made a firm decision to expand. Based on all of the same information (including the latest market data and economic reports), you develop a detailed analysis of what the company can expect in terms of revenue and expenses, capital investments, and cash flow. Since your analysis is based on actual plans and conditions as they are known today, it would be deemed a forecast.

Both forecasts and projections are forward-looking statements; they both amount to predictions that management is making about future financial results. The difference is whether those predictions are based on theoretical conditions and actions, or on the best available information that aligns with a clearly intended course of action.

Note that both of these terms are different from “budgets.” While projections are predictions of what management expects might happen, and forecasts are predictions of what management expects will happen, budgets are an expression of what management hopes to make happen. Because budgets often serve as targets for performance management, they do not necessarily align fully with forecasts either.

Key Differences Between Financial Forecasts and Projections

Above are some key differences between forecasts and projections, but let’s explore those in further detail:

1. Assumptions

The first difference between projections and forecasts, of course, has to do with the assumptions that are made going into making them. Since they may be relied upon as predictions of what is expected to occur, forecasts require a higher level of rigor. To the best of the management’s knowledge, each forecast represents something approximating expected actual financial results.

Projections, in contrast, allow for virtually unlimited flexibility, provided that those assumptions are made clear to the people who are relying on the information presented

2. Timeframes

Although projections and forecasts are not necessarily strictly limited to the timeframes they represent, forecasts tend to focus on shorter-term expectations. After all, the further out you extend a forecast in time, the less likely it is to be accurate. Forecasts are typically aimed at predicting quarterly or annual results, rarely extending much beyond a one-year timeframe.

Projections, however, can address either short-term or long-term scenarios. This being said, looking into the future beyond a one-year horizon can make it difficult to accurately predict what demand might look like, which products might be in play, how the competitive dynamics facing the company might evolve, or what the overall economic climate will be.

Although it is entirely possible to build a longer-term forecast based on all known variables and the current intentions of management, the likelihood of such long-term forecasts being accurate decreases as the timeline extends.

3. How the Information is Used

Forecasts are often developed as market-facing analyses, intended to communicate likely outcomes to investors, lenders, stock market analysts, and other interested observers. In essence, forecasts tell the world what a company’s management expects will come to pass. As such, forecasts are developed with a certain level of rigor, enabling management to show how it is mathematically possible to achieve the results they are predicting.

Projections, on the other hand, are typically intended for internal use. They are often developed to help answer a host of different “what if” questions from company management. Projections tell a story of what might happen as a result of one or another strategic decision. Similarly, they predict (as best as might be possible) how changing economic conditions, supply chain disruptions, or technological changes might impact the organization.

When Your Business Should Use Each Method

In some circles, it might seem reasonable to use the terms forecast and projection interchangeably, but when you’re dealing with the people who rely on this information to make critical business decisions, it’s important to be as precise as possible. To clear up any confusion, here’s a quick list of when your business will likely use each method, ensuring your team is staying on the same page:

Use a Forecast When Your Business Wants To:

• Plan annual budgets
• Manage cash flow expectations
• Communicate financial expectations to various stakeholders
• Align team performance with larger organizational goals

Use a Projection When Your Business Wants To:

• Evaluate long-term strategy
• Analyze new business opportunities such as acquisitions, new markets, or mergers
• Assess the best and worst-case scenarios for a given decision
• Model potential products or service launches

Whether you’re producing a forecast or a projection, both require a considerable amount of time and attention to detail. Insightsoftware can help you prepare your reports faster and more accurately, with less effort. JustPerform turns forecasting into a faster, more reliable team process by connecting your actuals to workflows, ensuring that your projections stay consistent, auditable, and simple to update. With JustPerform, you can run multiple scenarios in minutes, align stakeholders without the typical spreadsheet chaos, and publish a forecast you can trust. If your organization wants to improve its financial analysis capabilities, learn how insightsoftware can help you exercise control over your financial planning today.

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