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 circ*mstances of the business, such as an investment in a new product line.
Advantages of a Financial Projection
The main advantage of formulating a financial projection is that it forces you to assemble and then question your assumptions regarding future conditions. By taking the time to analyze these assumptions, you will have a better understanding of what it will take to achieve a targeted result.
