When you refer to a forward-looking financial expectation, do you call it a forecast or a projection?
There is not a generally accepted distinction between forecast and projection within the finance community. In normal dialogue, they are synonyms. Although there is one subtle distinction associated with the time horizon of each.
“Forecast” means a projection of financial results or key metrics in the near term (1 to 4 quarters out) with visibility to leading indicators. For revenue or booking forecasts, there is good pipeline or backlog data to make a solid forecast; for expense, there is visibility into hiring pipeline or opex spend based on committed or almost committed contracts.
The term “projection” is used within finance to mean predicting financial results further out into the future (1 or more years) and using high-level drivers like sales capacity, market growth rate, and historical growth trends to project future results.
So both forecasts and projections are used within organizations to estimate a future financial position of the organization. These financial forecasts and projections are developed by the Financial Planning & Analysis (FP&A) team within an organization’s finance department as tools to support business strategy, tactical changes, and strategic decision-making. By estimating expected future financial results, executives can make better decisions on where to invest, where to pull back, and what to prepare for.
Forecasts and projections are typically developed using a combination of quantitative and qualitative methods to ensure rigorous analysis of available data is combined with insights derived from executives, analysts, market trends, and other experts and sources. Forecasts and projections exist at many levels in the organization, from granular forecasting of product demand at the SKU level, to sales projections for a specific sales region, to overall financial results by department or the entire company.
So it’s solved: forecasts and projections are generally accepted synonyms, and you can confidently use them interchangeably in your finance career. Technically you can place a distinction on the time horizon of each, though this is a minor difference that rarely gets applied in the real world.
Regardless of your terminology, Planful Planning supports traditional financial budgeting, quarterly forecasting, and long-range strategic projections. It allows you to start with whatever planning process you desire and evolve as you see fit. Planful Planning also enables you to easily forecast, project, and evaluate estimates of different financial outcomes before they happen so you can make better decisions and, ultimately, achieve your desired goals and objectives.
If you’re forecasting a need to accelerate and streamline your planning, budgeting, and forecasting processes, visit hostanalytics.com. Our forecast says you’ll be happy you did.