Understanding the difference between a projection and a forecast can prove to be useful when evaluating financial information. Projections tend to be more broad and provide information based on what could happen financially. Projections can be used as a goal to reach because of this. A forecast, however, takes into account all of a firm's plans and positions to explain what is expected to happen over a period.
Projection vs. Forecast: What is the Difference
While they share similarities, a forecast and a projection have distinct meanings and contexts. Here's a brief overview of each:
- A projection typically refers to a straightforward extrapolation of past trends or historical data into the future.
- It relies on the assumption that future conditions will continue in a manner similar to what has been observed in the past.
- Projections may not necessarily involve a rigorous analysis of underlying factors or potential changes in the environment.
- A forecast involves a more comprehensive and analytical approach to predicting future outcomes.
- It takes into account various factors, including historical data, current conditions, and potential changes in the environment that could impact the future.
- Forecasting often uses quantitative models, statistical analysis, and expert judgment to generate predictions.
- In summary, a projection is often a simple extension of past trends, while a forecast involves a more thorough analysis that considers multiple factors. Forecasts are generally considered more sophisticated and may incorporate a range of scenarios or uncertainties, providing a more nuanced view of possible future outcomes.
For example, in financial planning, a projection might involve a straightforward extrapolation of past sales growth, while a forecast would consider factors such as economic conditions, market trends, and potential changes in consumer behavior to provide a more comprehensive prediction of future sales. In this way, a projection makes sense when considering general resource allocation. Where is the firm headed? Where are markets headed? What kind of market share will be able to gain in the coming quarter? We need to be able to project these things to even begin to set strategic plans for the firm.
For example, if a company working in telecommunications projects radio will continue to decline in revenue and relevance, they will be able to allocate more resources to building a forecast for their streaming services. They will then use their projection about streaming services and include more factors to ascertain their future potential. This can include competitor analysis, understanding the laws going into effect in this area, and interest rates. These external factors are incredibly important when forecasting growth.
Projection vs. Forecast: When to Use Each
The choice between using a projection or a forecast depends on the specific context, the nature of the data, and the level of accuracy and detail required. Here are some guidelines on when to use each:
Use Projection When:
- Linear Trends: If historical data shows a clear and consistent linear trend, a projection might be appropriate for a short-term extension of that trend into the future.
- Simple Extrapolation: When you have limited data or a straightforward pattern, and you need a quick estimate without considering complex factors or uncertainties.
- Short-Term Planning: Projections are often suitable for short-term planning when the assumption of continuity from the past is reasonable.
- Resource Constraints: If you have limited resources or time, and a more detailed analysis is not feasible, a projection may provide a quick and easy estimate.
Use Forecast When:
- Complex Factors: When there are multiple variables and complex factors influencing the future outcome, a forecast is more appropriate. It allows for a more comprehensive analysis of these factors.
- Uncertainty and Risk Management: If there are significant uncertainties or risks that could impact future outcomes, a forecast with scenario analysis can help account for different possibilities.
- Long-Term Planning: For long-term planning, where the assumption of a constant trend may not hold, a forecast that considers changing conditions and evolving factors is more suitable.
- Decision-Making with Consequences: When decisions based on future estimates have significant consequences, using a forecast provides a more robust foundation for decision-making.
- Strategic Planning: In strategic planning, where a nuanced understanding of potential future scenarios is crucial, forecasts offer a more detailed and informed perspective.
In many cases, a combination of both projection and forecast might be used. For example, a projection for short-term planning and a more detailed forecast for long-term strategic decisions. It's important to assess the specific requirements of the situation and choose the approach that aligns with the level of analysis and accuracy needed.
How Can We Help?
Creating projections and forecasts can be a daunting task, LiveFlow is here to help. We offer several forecasting templates that automate much of the planning and forecasting required to build a projection or forecasting dashboard. This will create a dynamic, client-ready dashboard that reduces your workload. To learn more about LiveFlow, book a demo.