Businesses rely on effective financial planning to succeed. Two of the most common business reports used for strategy sessions are financial forecasts and projections. These reports are very similar and yet are developed and utilized in different ways. If you are starting a business and possibly seeking investors or looking for the best way to expand your existing business, then knowing how to produce and apply this type of financial information can help you plan effectively for the future of your business.
Similarity of financial reports that attempt to predict the future outcome of business activities
Financial forecasts analyze a company's current financial data to predict how the organization will progress in the future. A financial projection is based on the assumptions in the financial forecast, but use that information to form one or more hypotheses that address the '"what if" scenarios that business owners want to explore - such as "What if our business doubles in the next 6-months?" or "What if our largest supplier pulls out of the market?". Both reports are based on the budget numbers and help to chart the future course of action for the business.
The difference comes in the ways these similar reports are used
Financial forecasts are helpful primarily for internal management to use in comparison to the budget, or the financial plan of action, to decide if the business is following the plan or missing the mark. If it is determined that the business has gotten off track, then management can choose an appropriate action to correct the situation.
While the financial forecast gives a future look at where the business is likely to land if it continues on the current path, financial projections take into account some of the alternative paths and ensuing probable outcomes, offering some answers to those "what if" questions. Financial projections are often used by outside entities in determining whether to provide financing terms or engage in business with your company.
The financial forecast shows you where your business is going, and the financial projection allows you and your financial adviser to consider some alternatives. If you are starting a business, needing an assessment of your current business financial plan, or wanting to grow your business, the financial professionals at Lindemeyer CPA can help you develop the financial forecasts and projections that you need to make informed decisions. Contact Nathan or Beth to start a conversation about the financial health and future of your business.