The Difference Between Financial Projection & Forecasting

Financial projection and financial forecast are two different terms. Yet even seasoned professionals interchange them.

Yes, they have similarities—for example, they’re both forward-looking statements. But they also have key differences.

As a small business owner in the UK, there will be times when you need to use these processes—and for good reason. They’ll give you a glimpse into your company’s future growth and performance. That means you have to understand which one to use and when. Having this knowledge will impact everything from how effective your decisions are to how easily you can plan for the future. The Bank of England estimates GDP growth at 1% for 2025—that’s just below the OECD forecast of 1.2%. This economic environment means SMEs are likely to face more challenges ahead. But that makes predicting the future all the more important.

This article discusses the difference between a projection and forecast. But first, let’s walk you through the basics.

What is a financial forecast?

A financial forecast is an analysis that predicts future financial outcomes. You base this on three factors: historical data, current trends, and future projections. This gives a rough idea of expected revenue, expenses, and cash flows over a given period.

Forecasts reflect what could happen based on existing conditions and plans. This helps you decide things like where to place most resources. But it’s also useful for investment strategies and risk management.

Let's take a software company, for example. They might look at customer behavior trends to predict a 15% increase in revenue for the next quarter. They take data from their customer data platforms to arrive at this figure. They also look at positive market indicators and historical growth patterns.

Advantages of financial forecasting

Nail financial forecasting, and you'll be well-placed to grow the business. Here are a few other crucial benefits:

Attract investments: Research shows that business investment grew around 1% in Q2 2024. That’s great news for small business owners. But if investors can’t picture your company’s financial future, they won’t invest in it. A financial forecast highlights your growth potential. Yes, it shows your expected revenue streams. But it also reveals profit margins and ROI projections. This gives potential investors confidence to start funding your business.
Gauge business viability: Want to know if an idea or expansion plan will work? Forecast it! You can then decide to proceed with your business plan as is. Or you can make adjustments first. This also prevents you from spending too many resources or capital on something that won’t get off the ground.
Reduce financial risks: Forecasting gives you a holistic view of your business. This shows where you’re wasting resources so you can move or limit them.
Improve business performance: The most successful businesses are constantly improving. Insights you get from forecasts help you identify key performance indicators (KPIs). Then, you can track progress against goals and make changes to improve operations.

What is a financial projection?

A financial projection is a hypothetical analysis. It estimates potential financial outcomes based on “what-if” scenarios and assumptions.

We know that forecasts predict likely outcomes. But projections evaluate different options or possibilities you want to happen.

They allow you to assess the impact of your decisions. It doesn’t matter whether you’re entering a new market or launching a new product. You can use projections to plan among the team and create relevant business strategies.

Let’s stick with the software company example from earlier. Let’s say the company wants to expand into a new region or launch more features. They create several financial projections to test different scenarios.

They project revenue growth for three different scenarios:

Optimistic (30% growth)
Moderate (15% growth)
Conservative (5% growth)

They factor in variables like market penetration rates and competitive responses for each.

Advantages of financial projections

So, why are projections useful? Here are just a few reasons:

Estimate future sales: Research shows that 30% of business’ biggest challenge is financial stress. Making projections reduces some of this stress as you can anticipate future profits and revenues. They also help identify the source of current income. With this information, you can make changes to your pricing and marketing tactics to increase sales.
Budget better: Cash flow projections estimate current operating budgets. This helps companies determine future capital expenditures.
Calculate ROI: You can check if an investment is worth it and calculate expected profit. For example, a company can understand if it is worth going into debt to finance a new product line. This information allows businesses to test the holistic performance of an investment.

Now you have a better understanding of these two concepts. Let’s discuss how they differ.

So, what are the biggest differences?

A forecast aims to shape decisions for the immediate future. Projections prepare you for long term hypothetical scenarios.

Let’s break down these differences in more detail:

1. Assumptions

Financial forecasts need a higher level of precision and no bias. Why? Because you may come to rely on them to decide what is likely to occur. Ech forecast approximates expected actual financial results.

In contrast, projections leave room for unlimited flexibility about assumptions. Of course, you have to make those assumptions clear to the people relying on the information.

But, because projections are flexible, it doesn’t mean they don’t rely on data. Like forecasts, its accuracy depends on data quality. That’s why a robust data processing pipeline is essential.

A data pipeline reduces errors by validating and refining raw figures before you analyse them. This means you only feed accurate and relevant data into your financial models.

2. Timeframes

Timeframes for forecasts and projections are not set in stone. But forecasts tend to focus on short-term expectations (usually a few months to a year). This means you can make immediate decisions and be more confident in how accurate they are.

But, projections usually extend more than a year (or even several years). They shape how a company will navigate future events and potential market conditions. That long-term nature means stakeholders spend more time discussing assumptions. They also use enterprise collaboration systems to review risks and opportunities.

3. Use cases

Companies use forecasts to communicate likely financial performance. That could be to lenders, investors or stock market analysts. Forecasts help management tell all of these stakeholders what they expect to happen.

So, you must develop forecasts with a high degree of precision. This way, management can prove how achieving the expected results is possible.

Projections are generally meant for internal use. They are often developed to answer a host of “what-ifs” from company management.

Projections describe what might happen due to one or another strategic decision. They also predict the impact of supply chain disruptions or technological changes.

Wrapping up

It’s easy to get confused between financial projections and forecasts. But you have to look at them separately, especially when making business decisions.

Financial forecasts are short-term. They predict likely outcomes based on current data and market conditions.

Financial projections explore many scenarios over longer periods. They are better served to help with creating strategies and assessing risks.

Bear in mind that neither is 100% accurate. The future is that hard to predict. Yet, a well-crafted and timely forecast or projection shows what’s to come and sets you up for success.

About the author

Brooks Patterson is the Interim Head of Product Marketing at RudderStack. RudderStack specialises in warehouse-native customer data platforms (CDPs) that simplify data integration. The company also hosts The Data Stack Show, sharing insights and innovations in data engineering and analytics.