Forecasts and projections in business are a great way to estimate the future financial position of the company.
Forecasts Versus Projections
As accountants, clients often ask, “What is the difference between a business forecast and a projection?”
In simple terms, forecasts make assumptions based on business history, while a projection adds proposed considerations into the calculation. Perhaps you are considering a new loan, adding a new product line, or adding a new business location.
Your Company’s Competitive Advantage
Whether your company is completing a projection or a forecast, looking ahead will give your company a competitive advantage. There are two ways that a business will use these statements, internal and external. Internally, management can examine how their business is doing now and what they expect it to look like in the short-term. Externally, the company is looking for additional funding, through either investors or a bank.
Step One: Income Statement
The first step is to figure out how your company is doing financially. The best way to determine financial health is to look at your current income statement and analyze the income and expenses reported. You will want to evaluate the totals of these sections: earnings per share, gross profit, operating costs, and net earnings. Note how and why your company has met or failed to meet these measurable results. These notations will help you in Step Three, where you will adjust your approach to achieve and maintain the goals of your forecast and projection to keep a profitable and sustainable business.
Step Two: Quantitative Models
The next step is to gather information to help you estimate what your business looks like in the future. One way to do this is to use a quantitative method. We rely mainly on quantitative models and use historical data and our knowledge of the current and future markets. Preexisting data and market statistics support many of our estimations. For instance, revenue projections relate to valid contracts, or expense projections can rely on fixed costs, such as rent. When you compile your income statements with specific line items, this will lead to better financial interpretation.
Step Three: New Forecast and Projection Goals
The most crucial step is to compare your forecast or projection to your actual company results from that same period. Analyzing by period will help you understand what happened during the year, and to properly apply your conclusions to next year’s projections. Complete at least one forecast annually to interpret your company financials best and meet its goals.
All projections require an income statement, balance sheet and statement of cash flows, contact a member at Wilke & Associates to help you compile your unique business forecast.
Amanda is a general ledger manager and business advisor at Wilke & Associates. She currently serves closely-held businesses using her prior experience as a corporate accounting manager in the manufacturing industry and prior audit experience in various industries; including manufacturing & distribution, logistics, real estate, and pension plans.