Have you heard people use the terms forecast and projection interchangeably? Maybe you’re one of those people! There actually is a significant difference between the two terms.
A prediction is a probabilistic statement that something will happen in the future based on what is known today. A prediction generally assumes that future changes in related conditions will not have a significant influence. A prediction is most influenced by the "initial conditions" the current situation from which we predict a change. For example, a weather prediction indicating whether tomorrow will be clear or stormy is based on the state of the atmosphere today (and in the recent past) and not on unpredictable changes in "boundary conditions" such as how ocean temperatures or even society may change between today and tomorrow. For decision makers, a prediction is a statement about an event that is likely to occur no matter what they do.
A projection specifically allows for significant changes in the set of "boundary conditions" that might influence the prediction, creating "if this, then that" types of statements. Thus, a projection is a probabilistic statement that it is possible that something will happen in the future if certain conditions develop. The set of boundary conditions that is used in conjunction with making a projection is often called a scenario, and each scenario is based on assumptions about how the future will develop. For example, the IPCC recently projected a range of possible temperature changes that would likely occur for a range of plausible emissions scenarios and a range of model-derived estimates of climate sensitivity. This is clearly a projection of what could happen if certain assumed conditions prevailed in the future it is neither a prediction nor a forecast of what will happen independent of future conditions. For a decision maker, a projection is an indication of a possibility, and normally of one that could be influenced by the actions of the decision maker.
What is the difference between them?
Prediction is for everyone and the weatherman believes the results to be attainable. The main difference between a prediction and a projection is the nature of the assumption.
These assumptions are based upon specific fact patterns, making it more representative of the expectations for actual future events. However, in a projection the assumptions are more of the desired scenario, not necessarily what is most likely to occur.
Keep in mind neither a forecast nor a projection is a budget. A budget sets the requirements for the period of time, where a prediction is an expectation of what is likely to happen, and a projection is what you would hope to happen.
So why does it really matter? Who really cares?
Management, investors, lenders….all involved parties do, which means you should! If you are a publicly traded company and you do not understand the point of a prediction and you release poor data it will affect your stock prices and ultimately the viability of your company. Even if you are not publically traded a good clear prediction helps bridge the gaps between the strategic plan and the operational budget. An accurate prediction will mathematically quantify how it is possible to attain the goals you have set.
A projection, although mainly for internal use, is intended to present a clear picture of those “what-if” questions that management is always asking. It can help make determinations on new product lines, major customer decisions to acquire or dispose of, labor decisions, the list can go on. It is important that effort is put into a projection to see the range of outcomes for every scenario. It is easier to implement ideas and proactively manage to the plan in place rather than react unsystematically to unforeseen circumstances.
Both predictions and projections have a definitive place in effectively managing your business. Make certain that you understand the purpose and process for each, and that you follow the decision making process required to make them valuable tools to drive the future profitability of the business.
A prediction is a statement of what is likely to occur based on current conditions, while a projection is a statement of what could occur based on a set of assumptions about future conditions.
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