In Financial Planning, Forecasts and Projections Aren’t the Same
Businesses are rightly encouraged to regularly generate professionally prepared financial statements. Doing so is important for both understanding your own financial position and providing accurate, comprehensive information to stakeholders such as investors, lenders and advisors.
However, keep in mind that financial statements are historical records. They depict the state of the company at a given point in time — not where it will likely be in the future. For the latter purpose, you need to create either a forecast or a projection. But aren’t those two things the same? Not exactly.
Defining the terms
The American Institute of Certified Public Accountants (AICPA) addresses the distinction under its AICPA Attestation Standards Section 301, Financial Forecasts and Projections. The organization differentiates the two terms as follows:
Forecast. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, […]