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So far in this blog I have kept away from topics that are likely to overexcite accountants!:  It’s been all words and not much on numbers.  I’ve got to be careful here that I don’t slide into the exciting world of the accountant and lose my general following.  Six weeks in, I’m drawn to the murky world of projections, forecasts and budgets.  For non-accountants and maybe even some accountants these terms are often used interchangeably but as I am about to reveal, they are different.

The projection is what we use to estimate where we want the business to go in the future. It is a long-term tool, usually covering three to five years but it can be longer. This is what we include in our strategy document or business plan.  A bank will look for your projections if you are going for funding and they may expect the years covered to reflect the term of the loan required.  If you are raising equity or grant funding it is likely you will need to produce projections. 

Projections can be a simple profit & loss for each of the years covered or it can be a complex model that integrates the balance sheet and cash flow and that can be scenario tested in real time.  This will depend on what is used for.  A projection will often include a large element of hope in it. 

A budget is usually set for a period of a year and it is a tool for measuring your business.  It may be based on a set of projections, by taking the first year’s projection or it can be prepared as a stand-alone item.  A budget documents where we expect the business to be over the next twelve months and it should be a reasonably accurate reflection of what is to come.

When we adjust the budget as the year goes on, for actual information we have, it then turns into a forecast.  It can be useful to change the heading from budget to forecast in any reports you produce to show that the figures are not what you originally laid down as the budget at the start of the year.  The budget turns into a forecast because continuing to compare actual to budget would have no value.

We also call a short-term projection a forecast if we are basing the projection on known facts.  In this case the forecast is less subjective and for a shorter period.  E.g. A forecast for the next two years for the French division based on the steady growth in that market for the last three years.

So now you know, prepare your projections when you’re strategizing, your budgets when your managing and if you change your budget during the year, call it a forecast.

Remember, when you Know Your Numbers, you can get the best out of your business.

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