Forecast or Projection – Who Cares?

Nov 05, 2013

shutterstock_130753661Have you heard people use the terms forecast and projection interchangeably? Maybe you’re one of those people!  There actually is a significant difference between the two terms.

forecast is based upon assumptions reflecting the conditions the business expects to exist and the course of action reasonably expected to be followed.   A forecast can utilize a specific monetary amount or a reasonable range based on the various assumptions in place.    This information is not restricted and it is typically what is published to the general public for publicly traded companies.  Management expects the goals in a forecast to be met and believes them to be reasonably attainable.

projection is prepared to present one or more hypothetical courses of action that the business might follow.  It is typically prepared for a restricted specific party, often internal management. This type of analysis can definitely be thought of as less realistic, even referred to as “pie in the sky”.

A fun way to remember the difference is that a weather FORECAST is for everyone and the weatherman believes the results to be attainable.  The main difference between a forecast and a projection is the nature of the assumption; in a forecast, these assumptions are based upon specific fact patterns, making it more representative of the expectations for actual future events.  However, in a projection the assumptions are more of the desired scenario, not necessarily what is most likely to occur.

Keep in mind neither a forecast nor a projection is a budget.  A budget sets the requirements for the period of time, where a forecast is an expectation of what is likely to happen, and a projection is what you would hope to happen.

So why does it really matter?  Who really cares?   Management, investors, lenders….all involved parties do, which means YOU SHOULD!   If you are a publicly traded company and you do not understand the point of a forecast and you release poor data it will affect your stock prices and ultimately the viability of your company.  Even if you are not publically traded a good clear forecast helps bridge the gaps between the strategic plan and the operational budget.   An accurate forecast will mathematically quantify how it is possible to attain the goals you have set.    A projection, although mainly for internal use, is intended to present a clear picture of those “what-if” questions that management is always asking.  It can help make determinations on new product lines, major customer decisions to acquire or dispose of, labor decisions, the list can go on.   It is important that effort is put into a projection to see the range of outcomes for every scenario.  It is easier to implement ideas and proactively manage to the plan in place rather than react unsystematically to unforeseen circumstances.

Both forecasts and projections have a definitive place in effectively managing your business.  Make certain that you understand the purpose and process for each, and that you follow the decision making process required to make them valuable tools to drive the future profitability of the business.

By: Tara West, CPA

Categories: Manufacturing & Distribution