What Is a Financial Projection?

Mary McMahon
Mary McMahon

A financial projection is an estimate of future revenue and expenses. This can be an important foundation of budget planning in addition to discussion about the future direction of a business or organization. A number of tools go into the preparation of an accurate and useful financial projection. They may be discussed in a formal written report to provide information for readers about how and why analysts arrived at specific numbers in a prepared estimate. Sources for projections can include annual reports and budget documentation.

An annual business report is an example of a financial projection.
An annual business report is an example of a financial projection.

Internal information is an important component of a financial projection. Company records can provide information about earnings and expenses over previous accounting periods, and may offer insight into growth rates. This information can help analysts begin to estimate how much the company might reasonably expect to spend and bring in. Support for internal documentation can include audits and detailed financial reporting to back up the numbers and provide context.

It is also necessary to consider external factors in a financial projection. These can include market conditions, regulatory climate, and the outcome of studies and analysis. A firm selling a product that will be subject to tighter regulations might expend to spend more on compliance in the future, for instance. Likewise, studies might show that demand for a given service is waning, and a financial projection would need to reflect this in order to provide accurate information.

Forecasting is critical for budget preparations. Companies, organizations, and agencies need to know how much money they will have to work with after meeting expenses so they can plan. Big initiatives like new product releases require funding support, and companies do not want to run out of money partway through. The financial projection may include some allowance for error to ensure that even if revenues fall short of expectations, money will still be available.

Documentation can also assist with long term planning. Projected shortfalls indicate a need to change business and budgeting strategy. Companies that notice they are starting to be less relevant in a given market would want to consider ways to expand their offerings to appeal to new customers, or change direction to adjust to a changing market. Business and financial planning are closely linked, making it important to use accurate and detailed analysis to make decisions about the future of a business. Good projections can help companies avoid costly mistakes that might result in throwing good money after bad or stumbling on the market.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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