If financial planning isn’t top of mind when you think about fundraising, that’s where you go wrong. Financial planning is as important for securing investments and going global as having a compelling vision, strong product-market fit, and a stellar team. 

Many businesses do forecasts and projections, but not all of them understand the difference between those two, hesitating which one to choose. In most cases, you need both. But what if you need to estimate your company’s financial performance for the next year to manage short-term goals and cash flow? Or evaluate the financial impact of a potential global expansion? Knowing the difference will help you know when to use the right financial tool. 

In this article, we’ll break down the difference between a projection and a forecast, the benefits of using each, and how to decide which one to choose to predict and adjust your company’s future performance based on their different purposes.

Financial Forecast Meaning

A financial forecast is a conservative, data-driven prediction of a company’s future performance based on current and historical data. Simply put, forecasting is about setting realistic expectations—management estimates whether the expected course of action will lead to the desired financial position and results.

Forecasting financial statements over a specific period is like using a crystal ball for your business. It sets clear performance expectations, showcases a company’s growth potential, and facilitates faster adjustments based on actual performance. Business owners rely heavily on forecasts to gain clarity on KPIs—which metrics to track to keep the company aligned with its goals.

Financial forecasting is key when it comes to cash flow and risk management. It ensures liquidity by predicting cash inflows and outflows and mitigates risks by assessing the feasibility of projections and creating multiple future scenarios. Last but not least, a forecast appeals to a general audience, helping attract new investors to a company.

Financial Forecasts Example

You run a SaaS company and expect your annual recurring revenue (ARR) to increase by 18% over the next year with a new marketing strategy and customer acquisition/retention initiatives. Your current ARR is $150,000 (your sales by the end of the previous year).

This simple example of forecasting financial statements demonstrates how your revenue is expected to grow each quarter. However, revenue is just one element of a forecast. In practice, your forecasted income statement will be a standard report but with future dates, like this:

Financial Projections Meaning

A projection is a financial model that outlines what a company expects to achieve in the future under certain assumptions. These assumptions are hypothetical and often optimistic, typically answering “what if” scenarios. 

Projections predict how a company’s financial performance will be influenced by market changes or strategic decisions. A projection analysis forces companies to think outside the box, considering scenarios beyond historical performance, such as changes in interest rates or supply chain disruptions. It’s usually a long-term estimate, covering three to five years.

In fact, projections show business owners the potential financial result of new actions, like introducing a new product or opening a new location. In other words, they tell you what is likely to happen and what you need to do to achieve those results.

Given the uncertainty in meeting desired targets, projections are primarily used for internal planning. Although they can be used for external fundraising, showing a company’s growth potential, many investors prefer more conservative and realistic forecasts.

Financial Projections Example

Think about financial projections in the meaning of scenario analysis. A simple example is planning for a new product launch.

First, create a baseline revenue forecast. Assume you currently generate $500,000 annually. You plan to launch a new product, expecting it to add $200,000 in revenue, bringing the total to $700,000.

Main Differences Between Forecast and Projection in Venture Funding

Although many, even seasoned financial advisors, use “forecasts” and “projections” interchangeably, these terms do carry a subtle but very important difference. Put shortly, projections are assumptions of what might happen, while forecasts are assumptions of what will happen in the future. Let’s break it down into more detail.

  • The main difference between forecast and projection lies in their purpose. A forecast is used for operational guidance, budgeting, and cash flow management. It’s a vital cog in managing a company’s day-to-day operations and ensuring liquidity. Conversely, projections are pivotal for strategic planning, investment justification, and scenario analysis. They help outline long-term strategic goals and growth plans, demonstrating to investors the potential for high returns. 
  • Forecasts and projections have different bases. While forecasts are based on actual current and historical data and are updated regularly, projections are based on assumptions about future events, strategic initiatives, or market changes. There is no need to update projections regularly, as they serve a different goal—to illustrate potential outcomes under certain conditions. 
  • Another point concerns timeframes and the level of detail. Forecasts are short-term predictions, typically covering the next 12 months. Detailed and specific, they include monthly or quarterly breakdowns. Unlike forecasts, projections are long-term, usually spanning three to five years. They are more general and strategic, with annual summaries. 
  • Forecasts and projections play different roles in risk management. Forecasts are used for real-time risk mitigation. As they provide up-to-date financial insights, it becomes easier to manage and mitigate short-term risks. Projections streamline strategic risk analysis. They help identify potential long-term risks and opportunities that are key to strategic planning and risk mitigation. 
  • Last but not least, they have specific places in fundraising. Forecasts communicate current performance and upcoming expectations. This helps investors get a company’s immediate financial health and operational efficiency. Conversely, projections justify a company’s valuation during fundraising rounds as they illustrate its future profitability and growth potential.

Balancing Projections and Forecasts

Successful companies understand the importance of balancing forecasts and projections in their financial strategy. Notably, this balance adds much value while fundraising. Optimistic long-term projections can motivate a team to achieve desired scenarios and attract investors interested in supporting these efforts financially. 

However, relying solely on a projection analysis is risky. Without the grounding of a solid forecast, projections remain hypothetical assumptions. Investors don’t write big checks based only on big ideas; they need solid, data-driven proof that these ideas will yield high returns. This is where financial forecasts come in. 

Financial forecasts help businesses stay agile during economic headwinds. They allow companies to respond to challenges in real-time while simultaneously eyeing long-term strategic goals outlined in projections. While a projection analysis offers an optimistic view of a company’s potential future, a forecast provides investors with a full picture of its financial health and realistic growth potential. If you still hesitate whether balancing both matters that much, look at this story. 

Our client, an influencer marketing startup, struggled to secure funding mainly due to flaws in their financial and business models. We helped them create a realistic, actionable, and flexible financial model. The result? They convinced top UK VCs of their growth potential and sharp judgment and eventually raised £3M in funds.

Consequently, balancing forecast and projection helps startups navigate the often unpredictable journey of growth, ensuring they make smart decisions that fit both their current situation and future goals.

If you want to win investors over, consider both

While forecasts and projections both deal with future numbers, the main difference lies in their purpose and level of optimism. Forecasts are practical, rooted in current data and crucial for operational planning and risk management. Projections, on the other hand, are optimistic future predictions used to present the best-case scenario for growth and success. 

In the competitive world of venture funding, both projections and forecasts are crucial. Projections attract investors, while forecasts help retain them. That’s why balancing the two is so important. 
If you need to determine which part of your financial planning is leaking or how to create an investor-appealing deck that clearly communicates your financial forecasts and projections, our expert financial analysts are here to help you raise your next funding round successfully.

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Ruslana

CONTENT WRITER

Hello! I'm Ruslana, a Content Writer at Waveup. Based on my background in marketing research and business analytics, and my current collaboration with the savvy team at Waveup, I'm excited to share my insights and learnings with you.