The Difference Between Forecasts and Projections

July 15, 2016

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As business advisors, we are often engaged to prepare forecasts and projections regarding the future outlook of a business operation. Although the two terms are often used interchangeably, there are key differences between a forecast and a projection.

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As defined in the CPA Canada Handbook:

  • A forecast is “future-oriented financial information prepared using assumptions all of which reflect the entity’s planned courses of action for the period covered given management’s judgment as to the most probable set of economic conditions.”
  • A projection is “future-oriented financial information prepared using assumptions that reflect the entity’s planned courses of action for the period covered given management’s judgment as to the most probable set of economic conditions, together with one or more hypotheses that are assumptions consistent with the purpose of the information but are not necessarily the most probable in management’s judgment.”

As described above, a forecast is based on management’s best estimate of future results and the most-likely scenario assumptions; alternatively, a projection allows for more hypothetical inputs that could be used for what-if scenarios. By definition then, forecasts provide a more likely scenario of occurrence when compared to projections, which depending on the assumptions used, may deviate from a likely result.

Although the terms forecast and projection are often used interchangeably, one should be cognizant on whether to name their financial model as a projection or a forecast as some users of the financial model may place undue reliance on the work. If actual results are significantly different than what was forecasted or projected, the user of the model may have different reactions depending on if the financial model was originally presented as a forecast or as a projection.




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