Financial Forecasting vs. Financial Projections
It all boils down to timing:
- Financial forecasts are short-term predictions.
- Financial projections focus on the long term.
Let’s detail these two terms, understand their nuances, and learn how to apply them to predict your organization’s future financial performance more accurately.
What is financial forecasting?
Financial forecasting refers to the process of leveraging current and historical data to more accurately project future business performance. It’s a method for finance teams to predict future performance and guide strategic planning, budgeting, and resource allocation across the organization.
Typically, finance teams will forecast for the next one to four quarters. By focusing on the nearer-term, forecasts leverage recent data, growth rates, and trends to predict future performance, profit margins, and revenue.
Let’s say you want to forecast your gross margins for the remainder of the year. You’ll evaluate the gross margin percentage for the last several quarters, looking for patterns, seasonality, and trends. You’ll then consider future plans to invest in growth or shift resources and include broader market trends.
If your gross margins have been cyclical or seasonal, for example, you can forecast that your gross margin will behave similarly over the next several months. Similarly, if you’ve been investing in areas to improve profitability, you might assume that gross margins will continue to increase.
What are financial projections?
Financial projections are a more in-depth way to predict future financial performance, business performance, revenue, and more using high-level internal and external drivers like:
- Sales capacity
- Marketing investments
- Workforce changes
- Customer retention
- New customer acquisition rate
- Market expansion trends
By factoring in these and other financial drivers, you’ll have data that empowers you to more accurately predict future financial performance.
The term “projection” is used in finance to predict future financial results beyond the next four quarters. Often, financial projections will build upon the forecasting you’ve already done.
What internal data to include in financial projections
In addition to external data, financial projections require you to collect internal data from three financial documents:
- Income statement
- Cash flow statement
- Balance sheet
These three components have data you can use to predict your business performance in several areas besides revenue and sales.
An income statement shows your revenue, expenses, and profit for a certain period. Patterns in these elements will help you understand what you can expect your future revenue, expenses, and profit to look like.
A cash flow statement shows your incoming and outgoing cash so you can predict whether to save or invest. If your predictions show that you will have excess cash flow, you can invest some of that revenue and increase your cash reserves even more. Alternatively, if you predict a more modest cash flow in your projections, you can save it.
A balance sheet shows your liabilities, assets, and equity. When you compare these components to balance sheets from previous years, you can see patterns that allow you to predict long-term trends.
When to use financial projection vs. forecast
Use financial forecasting when you need to plan for the coming year. Then, make financial projections to build on your forecasts for the next year and beyond.
Forecasting is a quick way to show your financial trajectory. Use projections to predict scenarios outside of performance history or for activities like budget planning, business continuity planning, and succession planning.
How Chosen Foods streamlined forecasting with Planful
Chosen Foods, a provider of avocado oil-based products, was weighed down by bulky and manual workflows, outdated finance tools, and offline spreadsheets, leading to inefficiencies across the organization.
Jim Mancuso, CFO and COO at Chosen Foods, observed that the finance team spent excessive time manually pulling data instead of analyzing it, which took time away from decision-making.
To address this issue, Chosen Foods invested in Planful. In just eight weeks, Planful was able to improve the financial IQ of decision-makers organization-wide.
Jim cited a specific example regarding the company’s sales team. The Finance team now gives key users in Sales access to Planful, allowing them to input their data and update their forecasts in real time. This level of collaboration saves the finance team time and eliminates surprises in the planning process by improving visibility across the organization.
On the improvements to financial forecasting since implementing Planful, Jim shares:
“As CFO, I can plan for multiple scenarios. Now, I can see what could happen if we lose an account or have a material cost increase and how it could impact the business. What used to take me days or weeks, I can do in a matter of hours, thanks to Planful.”
Let Planful transform your financial forecasting processes
Forecasting and projections are indispensable financial planning tools, each with unique strengths and applications.
Forecasting is best used for nearer-term predictions, while projections predict financial results further out into the future. Organizations can leverage both to navigate uncertainties and drive long-term business success by understanding the differences between forecasting and projections.
Whether you’re forecasting, projecting, or both, Planful can help.
Our financial performance management technology makes it easy to collect the data you need and turn it into valuable information for planning future success.
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