Financial projection definition
/What is a Financial Projection?
A financial projection shows the expected revenues, expenses, and cash flows of a business over a forecast period. This forecast may be used internally as the basis for a more detailed budget, or it may be presented to outsiders. In the latter case, a financial projection may be used to convince a lender to provide a business with a loan, or investors to buy shares in the firm. A financial projection is based on a combination of historical results, expectations for changes in the relevant market, and other changes in the circumstances of the business, such as an investment in a new product line.
Advantages of a Financial Projection
The key advantages of a financial projection are as follows:
Informed decision-making. Projections provide a clear picture of potential future financial performance, helping management make informed decisions regarding investments, expansions, and operational strategies.
Budgeting and resource allocation. Projections help in setting budgets by estimating future revenues, expenses, and cash flows, ensuring optimal allocation of resources.
Risk identification and mitigation. Financial projections can identify potential shortfalls in revenue or cash flow, allowing businesses to address risks proactively and implement contingency plans.
Performance benchmarking. Businesses can compare actual financial results against projections to assess performance and identify areas for improvement.
Support for decision scenarios. Financial projections allow businesses to model various scenarios (e.g., best-case, worst-case, or most-likely-case) to understand how decisions, market conditions, or changes in strategy might impact financial outcomes.
Supports mergers and acquisitions. In mergers, acquisitions, or joint ventures, financial projections provide critical data for valuing a business, assessing synergies, and evaluating the potential return on investment.
Cash flow management. Accurate projections ensure businesses can anticipate cash flow needs, avoiding liquidity crises and ensuring funds are available for operations and obligations.