Financial Forecast vs Projection: What's the Key Difference?

Does a financial forecast make realistic predictions, or does a projection? And if a projection predicts realistic finances, then who predicts hypothetical scenarios?

Confusing 😵‍💫, isn't it? And it's understandable because this subject and its terms can even leave many people scratching their heads.

But not anymore...

In this blog, we'll break down financial forecast vs projection to clear up confusion and help you understand when and how to use each for your business.

Additionally, we will provide steps to create financial projections and forecasts that help you make an informed decision.

Let's get started.

Financial projection vs. forecast: key differences

Let's explore the key differences between projection vs. forecast, we’ll start with financial projection:

Situations that require financial projection

Financial projection is a core part of every business's financial planning, especially if your business is considering expanding or launching new products. Businesses use projections for multiple purposes, and they are as follows:

• Seeking investment or funding
• Planning for business growth and development
• Evaluating mergers and acquisitions
• Applying for business loans or credits
• Strategizing large marketing campaigns
• Exploring alternative revenue streams
• Budgeting for equipment purchases

Importance of financial projection

There's a common belief that financial projections are just for existing businesses. Not true. The table below highlights how projections are essential for both types of businesses:

Key Limitations of Financial Projection:

• Based on assumptions, it is less reliable for short-term decision-making.
• Sudden changes in the market can make projections inaccurate.
• Requires extensive research and industry knowledge to create realistic estimates.

Financial forecast

Now, let’s discover the key…

Situations that require a financial forecast

A financial forecast is based on the responsible party's assumption reflecting the circumstances it's expected to exist. Many companies rely heavily on financial forecasts for decision-making, resource allocation, and business expansion. Here are a few more situations where financial forecasts come into play:

• Estimating cash flow to ensure liquidity.
• Planning for business growth or contraction.
• Setting financial goals and performance targets.
• Optimizing marketing efforts for peak sales seasons.
• Planning equipment upgrades and facility expansion.
• Identifying potential financial risks and opportunities.
• Supporting strategic decision-making and business planning.

Importance of financial forecast

A financial forecast is critical for every business, from startups to established companies, as it helps guide decision-making, manage cash flow, and plan for growth. Here's why it's essential for all businesses:

Key Limitations of Financial Forecast:

• Focuses on short-term trends and may not account for long-term growth.
• Relies heavily on historical data, making it ineffective for new businesses.
• Cannot predict the impact of sudden market disruptions or economic downturns.

How to create a financial projection vs. forecast

Preparing a financial projection and forecast is like preparing two strategies for your business's future. Both financial forecasting and projection are different from each other. Let's explore both approaches in this section:

Creating financial projection

The financial projection is all about predicting the future of your business performance based on current trends, assumptions, and goals. Let's find out how we can do that:

1) Identify the purpose and timeframe of your projection

Financial projections primarily focus on future financial results, often spanning multiple years. However, the timeframe can vary depending on the purpose—whether it's for securing funding, internal strategy, or tracking performance over time. Decide if you need quarterly, annual, or multi-year projections to align with your goals.

2) Collect historical data and market analysis

If available, gather the historic financial statements, income statements, cash flow statements, balance sheet, and annual income. New companies without historical data have to rely on analyst reports, industry benchmarks, market research, and other relevant studies or analyses to support their assumptions.

3) Plan for different business circumstances

This step requires you to explore hypothetical assumptions to plan for both success, unexpected events, and potential challenges that may impact financial performance. Consider assumptions from both perspectives: What if you achieve success, and what if you face setbacks? Prepare your business and make projections based on hypothetical courses and “what if” questions.

• What if trends change?
• What if a new competitor enters the market?
• What if the business provides unexpected returns?
• What if a new product launch gets double the sales than expected?
• What does the government imply about new taxation or economic change?

The hypothetical situations you consider for your projections depend on how your business operates, the revenue you want to achieve, and your overall growth and development plans.

4) Forecast expenses

The situations you predicted in the previous step will help you identify your future expenses. For example, if you predict that by launching a new product, the sales have doubled than expected, think about the costs involved. These include direct costs, like producing your product (COGS), and other regular and one-time expenses. Also, consider how expenses may change as your business grows, and spends more time in the market.

5) Create a simple income statement

An income statement summarizes your projected revenue and expenses. It’s a simple annual budgeting process example for quick budgeting:

Creating financial forecast

Unlike projections, a financial forecast isn't created based on certain assumptions. Instead, it relies on real-time data, historical performance, past trends, and market conditions to predict how your business will perform in the future. Let's dive in to learn how to create one:

1) Analyze real data and trends

Unlike projections, financial forecasts use actual sales figures, expense patterns, and market research to make informed predictions. The aim is to reflect the most likely business performance shortly.

2) Focus on likely outcomes

Forecasts focus on the most probable outcomes by analyzing historical data, seasonal patterns, and economic conditions. Unlike projections, they do not explore hypothetical situations but provide a data-driven outlook to support budgeting, staffing, and operational decisions.

3) Do market analysis

Staying connected with the market is essential. It helps identify the market trends and external as well as internal factors impacting your business. And keeps you updated with competitive dynamics. This knowledge is key for understanding upcoming market changes and how they might affect your revenue, growth, and overall development.

Evaluate external factors

These are circumstances outside your control that can significantly impact your business. Ignoring them can lead to inaccurate forecasts and poor decision-making. By evaluating these factors, you can anticipate risks, identify opportunities, and adjust your strategy accordingly.

You can evaluate external factors by:

• Identifying key external factors like regulatory changes, technological advancements, and even geopolitical events.
• Assess their potential impact that might affect your revenue, costs, or operations.
• Incorporate them into your forecast based on the detailed insights you gather.

For example, if inflation rises, consumers may cut back on discretionary spending. This could lead to lower sales for your business. You might reduce your revenue growth assumption in your forecast from 8% to 5%.

Hire experts to build accurate forecasts & projections

In this blog, we dived into the details of financial forecasts vs. projections, and it's clear both are vital yet tricky and time-consuming.

Gathering historical data, evaluating the numbers, making assumptions, and whatnot—feels like an endless task!

That's where our financial forecasting service comes in. From gathering and analyzing historical data to building accurate forecasts and projections, our experts can guide you through every step with precision.

Our forecasting and projection services have helped hundreds of businesses organize their finances, impress their audience, and raise millions.

Connect to our experts today!