Financial Forecast vs. Financial Projection

If you're diving into financial planning, you might find yourself mixing up the terms “forecast” and “projection.”

It's totally understandable—they both involve predicting future financial outcomes. But scratch further and you’ll realize these terms actually serve very different purposes.

It’s important to understand the differences between these two terms,  especially if you need to present financial data to your team or stakeholders. Choosing the right approach and term can make all the difference in how your financials are understood and acted upon. With this blog post, we’ll break down the differences between forecast vs projection while highlighting when to use each.

Let’s get started.

Financial forecast vs. projection: Comparison

While both forecasts and projections are forward-looking statements offering an insight into an entity’s expected financial position in the future, there’s a substantial difference between the two.

Let’s understand those key differences in detail, but before that here’s a quick overview.

1. Purpose

The purpose of a forecast is to predict business’s financial health based on historical data and current trends. They focus on what is most probable under existing circumstances helping you manage budget or cash flow for the short-term.

Projections, on the other hand, explore potential financial outcomes under hypothetical scenarios. They focus on what could happen if certain strategies or decisions (e.g., entering a new market, launching a new product, or doubling the marketing budget) are implemented, helping you evaluate endless possibilities.

While forecasts provide realistic guidance rooted in current data, projections offer a way to visualize various outcomes of a hypothetical situation.

2. Assumptions

Financial forecasting models typically rely on financial metrics to make assumptions about the future. However, it also considers market trends while making predictions about the future.

Projections, on the other hand, consider internal and external drivers such as sales capacity, customer acquisition, market expansion, and competitive dynamics giving you broader insights to plan a business’s financial trajectory.

While forecasts provide a data-driven view of what’s likely to happen, projections focus more on what could happen under different scenarios.

3. Time-frame

Forecasts typically focus on the short term—covering the next month, quarter, or fiscal year. Rarely do they exceed a year and when they do, they top 12-18 months, at the most. Any further, and the forecasts may drift away from reality.

Projections, in contrast, can be short-termed or long-termed depending on the assumptions you are making. You can test the same assumptions over different time frames to get a detailed insight into their impact.

That said, financial forecasting is typically conducted for short time-frames while projections have a variable time frame, spanning up to decades when needed.

4. Use case

Forecasts are often shared with external stakeholders like lenders, investors, and stock market analysts to communicate the company’s expected financial performance. Since it's mathematically possible to show how you can achieve certain financial outcomes, forecasts are more reliable and trustworthy.

Projections, however, are more suited for internal use to assess the viability of different strategic initiatives. Occasionally, projections are used to illustrate potential growth opportunities and attract strategic partnerships from external stakeholders.

Ultimately, both forecasts and projections can serve internal and external purposes, in varying degrees.

5. Flexibility

Forecasts are built on a single set of assumptions, often limiting their ability to account for sudden market fluctuations. They are supposed to be realistic and accurate which makes them less flexible and unsuitable for exploring strategic initiatives.

Projections, on the other hand, are designed to be flexible and dynamic. It's possible to tweak your assumptions and see how different scenarios will impact your cash flow, growth, and revenue. Such flexibility makes them suitable for planning various strategic outcomes.

While forecasts provide stability and a clear path forward, projections offer the flexibility to adapt and innovate.

6. Certainty

Forecasts are built on established patterns and assumptions captured from historical data and current trends. To be reliable for short-term planning, they must closely align with the actual financial results.

Projections, however, are less certain as they rely on assumptions that may or may not occur. They focus on exploring potential outcomes rather than predicting what is likely to happen.

Forecasts are more predictable and reliable, however, projections are more suitable for testing strategies and evaluating long-term possibilities.

With that, we have explored the key differences between forecasts and projections for your sound understanding.

When to use a financial forecast vs. projection

It’s not a question of whether to use a financial forecast or a projection. You need both to achieve your short-term goals and long-term vision.

The real question is: When should your finance team rely on forecasts, and when are projections a better tool for preparing prospective financial statements?

Well, let’s break it down. By understanding the strength of each, you can develop a comprehensive approach to manage your current finances and build a robust plan for unknown events.

When to use a forecast

• Budgeting and financial planning: To allocate resources, set realistic financial goals, and plan for immediate operational needs
• Business performance tracking: To identify gaps in performance by tracking actual results with the set expectations

• Market trend analysis: To adjust strategies according to seasonal patterns and market trends

• Investor and stakeholder communication: To communicate the entity’s expected financial position to partners, investors, and even management
• Short-term resource allocation: To determine production, staffing, and inventory levels based on predicted demand
• Cash flow management: To build sufficient liquidity for the business’s day-to-day operations

When to use projections

• Strategic planning: To evaluate the financial impact of new initiatives, such as launching a product, expanding into new markets, or changing business models
• Testing assumptions: To evaluate and test different assumptions before implementing a strategy, i.e. testing different pricing
• Investor and partnership pitches: To show the long-term growth potential and strategic vision of the business to attract investors or form partnerships
• Long term growth planning: To tweak and assess long term viability of business and growth strategies
• Risk assessment and contingency planning: To assess the impact of external factors or market shifts and prepare for different financial scenarios

That said, use financial forecasting to build your financial plan for the coming year. Then, build on those forecasts and test your assumptions to get projections for the next year and beyond.

Plan your business financially using Forecastia

With that, you now have a clear understanding of what forecasts and projections entail.

However, building projections or forecasts is a bit of an extensive job. From making assumptions to putting together key financial statements (cash flow statement, balance sheet, income statement), and building solid visuals—there’s a lot to manage.

That’s where Forecastia—an AI-powered financial forecasting tool enters.

Forecastia AI takes over the entire process, eliminating the need to manually update and tweak endless spreadsheets. In just minutes, you can go from zero to detailed financial projections, all while integrating real-time financial data directly from your accounting systems.

Now, get to planning and build your forecasts and projections for the future.