Projected Financial Statements
Projected financial statements is a tool of the company to set an overall goal of what the company’s
performance and position will be for and as of the end of the year. It sets targets to control and monitor
the activities of the company.
Projected financial statements take into account past financial trends, market conditions, possible
changes and management expectations to arrive at a future financial picture.
Accounting alone only looks at past financial data. That is, the expenses you’ve already incurred and
income you’ve already earned. As well as the assets and liabilities you currently have on the books.
The following reports may be forecasted:
➢ Projected Income Statement
➢ Projected Statement of Financial Position
➢ Projected Statement of Cash Flows
Planning is the single most important factor in business success. A good plan not only helps
organizations focus on the specific steps necessary to make their ideas succeed but also helps managers
achieve both short-term and long-term objectives. Financial forecasts and budgets are the two main
planning tools in modern organizations. If used correctly, financial forecasting and budgeting ensure that
an organization always has enough money for the things that are most important to their short-term
and long-term success.
Another useful financial planning tool is Financial Forecasting.
Financial forecasting is the process of estimating or predicting an organization’s financial future based
on historical data. The main aim of a forecast is to quantify where the organization is headed over a
specified period of time.
Financial budgeting - refers to predicting the income and expenditure of the organization. It is the
process of calculating how much an organization expects to earn in a particular period and how such
earnings will be spent, keeping in mind the organization’s objectives over the budgeted period.
financial forecast is the projection of financial trends and outcomes prepared based on historical data. A
financial budget, meanwhile, is a statement of expected revenues and expenses over the budgeted
period.
financial forecast quantifies upcoming business activities that express where an organization is headed
over a specified period. A financial budget, meanwhile, quantifies the tactical plans that represent what
the organization’s management want to achieve during the budgeted period.
Forecasts are typically created for the long-term. Although you’ll occasionally find short-term
projections spanning, perhaps, a quarter, most forecasts span several years. Budgets, in comparison,
span a shorter period. A typical budget covers a single financial year.
Financial forecasts are extremely flexible. They are regularly adjusted to vary the assumptions as well as
to reflect changes in the operating environment. Budgets, on the other hand, are more static. Once
prepared, a budget is only adjusted where there are changes to initial assumptions.
Forecasts are strategic tools that organizations use to plan for their growth over several years. Budgets,
meanwhile, are tactical tools used to manage operations over an accounting period. It’s also worth
noting that whereas a budget can be used for variance analysis of actual vs. expected results, a forecast
is only a projection; it doesn’t provide any performance metrics that can be used for comparisons.
THE DIFFERENCE BETWEEN BUDGET AND FORECAST
Budget- Quantitative business plan prepared by management for a future period.
Quantifies- What management wants the company to achieve during the specified period
Time horizon- Usually done for short-term, maximum one accounting period
Flexibility- Comparatively static, statement updated less frequently to stay connected with prevailing
market conditions
Application- Serves as a control tool for managing operational performance in the short-term
Forecast- Estimate of future trends based on historical data.
Quantifies- What the company will achieve during the specified period
Time horizon - Usually done for long-term spanning several years
Flexibility- Comparatively more flexible, revised multiple times to incorporate real-time data
Application- Serves as input for preparing budgets and help management in developing the company’s
longterm strategic plan