What is a Projection? Understanding Business Forecasting for Better Planning

Running a business means constantly looking ahead – planning for next month, next quarter, and next year. Projections help you peer into the future and make educated guesses about what's coming, so you can prepare, plan, and make better decisions today based on what you expect tomorrow.

What is a Projection?

A projection is an estimate or forecast of future business performance based on historical data, current trends, and reasonable assumptions. Projections help you anticipate what might happen in your business so you can plan accordingly and make informed decisions.

Simple Definition: A projection is your best educated guess about what will happen in your business in the future.

Types of Business Projections

Financial Projections:

• Revenue projections: Expected future sales and income

• Expense projections: Anticipated costs and spending

• Cash flow projections: When money will come in and go out

• Profit projections: Expected profitability over time

• Budget projections: Planned spending across different categories

Sales Projections:

• Unit sales: How many products you expect to sell

• Revenue forecasts: Dollar value of expected sales

• Customer growth: Number of new customers anticipated

• Market share: Your expected portion of total market

• Seasonal patterns: How sales vary throughout the year

Operational Projections:

• Staffing needs: How many employees you'll need when

• Capacity requirements: Production or service delivery capabilities

• Inventory levels: Stock needed to meet demand

• Equipment needs: When you'll need to invest in new tools or technology

• Space requirements: Facility needs as you grow

Market Projections:

• Industry growth: How your overall market will expand

• Customer demand: Changes in what customers want

• Competitive landscape: New competitors or market changes

• Economic factors: How broader economic trends affect your business

• Technology impacts: How new technology might change your industry

Why Projections Matter

1. Strategic Planning:

• Goal setting: Establish realistic targets for growth

• Resource planning: Know what you'll need and when

• Investment decisions: Determine when to expand or invest

• Risk management: Identify potential challenges before they hit

2. Financial Management:

• Cash flow planning: Ensure you have money when you need it

• Budgeting: Allocate resources based on expected outcomes

• Funding needs: Determine if and when you'll need additional capital

• Profitability planning: Understand when you'll become profitable

3. Operational Efficiency:

• Staffing decisions: Hire the right people at the right time

• Inventory management: Stock appropriate levels without overbuying

• Capacity planning: Scale operations to meet demand

• Vendor relationships: Plan purchases and negotiate better terms

4. Stakeholder Communication:

• Investor relations: Show potential returns and growth trajectory

• Lender requirements: Demonstrate ability to repay loans

• Team alignment: Help employees understand business direction

• Partner discussions: Share vision with potential collaborators

How to Create Accurate Projections

Step 1: Gather Historical Data

• Past performance: Collect 2-3 years of historical data if available

• Seasonal patterns: Identify recurring cycles in your business

• Growth trends: Calculate historical growth rates

• Key drivers: Understand what factors most influence your results

Step 2: Analyze Current Conditions

• Market conditions: Assess current industry and economic environment

• Competitive landscape: Understand what competitors are doing

• Internal factors: Consider your current capabilities and resources

• Recent changes: Account for any significant recent developments

Step 3: Make Reasonable Assumptions

• Growth rates: Base on historical performance and market research

• Market conditions: Consider economic and industry forecasts

• Competitive factors: Account for competitive pressures and opportunities

• Internal capabilities: Be realistic about your execution ability

Step 4: Use Multiple Methods

• Trend analysis: Extend historical patterns into the future

• Market research: Use industry data and customer feedback

• Bottom-up modeling: Build projections from detailed components

• Scenario planning: Create multiple projections for different situations

Step 5: Document Your Assumptions

• Key drivers: What factors most influence your projections

• Data sources: Where your information comes from

• Methodology: How you calculated your projections

• Risk factors: What could cause actual results to differ

Common Projection Methods

Trend Analysis:

• What it is: Extending historical patterns into the future

• Best for: Businesses with consistent historical performance

• Calculation: Apply historical growth rates to current baseline

• Example: If sales grew 15% annually for 3 years, project 15% growth next year

Market-Based Projections:

• What it is: Using industry data and market research

• Best for: New businesses or those entering new markets

• Calculation: Apply market growth rates to your expected market share

• Example: If market grows 10% and you expect 5% market share, calculate accordingly

Bottom-Up Modeling:

• What it is: Building projections from detailed components

• Best for: Businesses with multiple revenue streams or complex operations

• Calculation: Project each component separately, then combine

• Example: Project each product line separately, then sum for total revenue

Regression Analysis:

• What it is: Using statistical relationships between variables

• Best for: Businesses with clear correlations between factors

• Calculation: Use mathematical models to predict outcomes

• Example: If marketing spend correlates with sales, use that relationship

Projection Best Practices

1. Start Conservative:

• Revenue projections: Be realistic about growth potential

• Expense projections: Plan for higher costs than expected

• Timeline assumptions: Allow extra time for implementation

• Market penetration: Don't assume immediate market acceptance

2. Use Multiple Scenarios:

• Best case: Optimistic but achievable outcomes

• Base case: Most likely scenario based on current trends

• Worst case: Conservative projections accounting for challenges

• Sensitivity analysis: How changes in key variables affect outcomes

3. Update Regularly:

• Monthly reviews: Compare actual results to projections

• Quarterly revisions: Update projections based on new data

• Annual overhauls: Comprehensive review of methodology and assumptions

• Event-driven updates: Revise when significant changes occur

4. Focus on Key Drivers:

• Identify critical factors: What variables most impact your business

• Monitor leading indicators: Track metrics that predict future performance

• Understand relationships: How different factors influence each other

• Validate assumptions: Test your assumptions against actual results

Common Projection Mistakes

1. Overly Optimistic Assumptions:

• Problem: Projecting unrealistic growth or market penetration

• Solution: Base projections on historical data and industry benchmarks

• Reality check: Compare your projections to similar businesses

2. Ignoring External Factors:

• Problem: Not considering economic, competitive, or industry changes

• Solution: Include external research in your projection process

• Monitoring: Stay informed about factors that could affect your business

3. Static Projections:

• Problem: Creating projections once and never updating them

• Solution: Regular review and revision based on actual performance

• Process: Build projection updates into your regular business routine

4. Insufficient Detail:

• Problem: High-level projections without supporting analysis

• Solution: Break projections down into components and document assumptions

• Validation: Ensure projections make sense at both detailed and summary levels

5. Ignoring Seasonality:

• Problem: Not accounting for predictable business cycles

• Solution: Analyze historical patterns and adjust projections accordingly

• Planning: Use seasonal patterns to plan cash flow and operations

Tools for Creating Projections

Spreadsheet Software:

• Excel/Google Sheets: Flexible tools for building custom projection models

• Templates: Use existing templates as starting points

• Formulas: Leverage built-in functions for calculations and analysis

• Charts: Visualize projections and trends

Business Planning Software:

• LivePlan: Comprehensive business planning with projection tools

• PlanGuru: Specialized financial planning and forecasting

• Adaptive Insights: Enterprise-level planning and budgeting

• Prophix: Corporate performance management platform

Industry Resources:

• Trade associations: Industry-specific data and benchmarks

• Government statistics: Economic and demographic data

• Market research firms: Professional industry analysis

• Financial databases: Historical performance data for comparison

Using Projections Effectively

Decision Making:

• Investment timing: When to expand or invest in new capabilities

• Resource allocation: Where to focus time and money

• Risk assessment: Potential challenges and mitigation strategies

• Opportunity evaluation: Whether new opportunities are worth pursuing

Performance Management:

• Goal setting: Establish realistic targets based on projections

• Variance analysis: Compare actual results to projected outcomes

• Course correction: Adjust strategies when results differ from projections

• Learning capture: Improve future projections based on experience

Communication:

• Team alignment: Help employees understand business direction

• Investor relations: Show growth potential and financial trajectory

• Lender discussions: Demonstrate ability to meet financial obligations

• Strategic partnerships: Share vision with potential collaborators

The Bottom Line

Projections are essential tools for business planning and decision-making, helping you anticipate the future and prepare accordingly. While no projection is perfect, well-researched forecasts based on solid data and reasonable assumptions can significantly improve your business planning and increase your chances of success.

Make good with your time by creating realistic projections that guide your business decisions without becoming paralyzed by the need for perfect accuracy. Remember that projections are planning tools, not promises – use them to prepare for the future while staying flexible enough to adapt when reality differs from your forecasts.

Remember: The goal of projections isn't to predict the future perfectly, but to think through possibilities and prepare for what's most likely to happen.