The concept of financial projections can go by many different names at your organization, including budgeting, forecasting, and financial planning. Whatever you call it, the concept is the same: using the lines and categories from your financial statements and adding values for future years to show possible future results, to play out potential consequences and help you make decisions.
All organizations, regardless of size, can benefit from making projections, whether it’s part of your annual budget process or for a long-range financial plan.
- Budgeting is an essential part of your accounting year, and should happen before the end of the fiscal year, as part of your preparations for the next year. A budget is an annual financial plan that helps you turn organizational goals into realities by adding revenue and expense targets that incorporate your plans. Budget projections give you a clear way to monitor your progress toward achieving your goals when you compare budgeted amounts to actual amounts over the course of the year.
- A long-range financial plan expands the budget process to 3-5 years, and reflects the organization’s long-term strategic goals. With long-range financial plans you can anticipate and incorporate trends in spending, giving, and earned revenue, as well as factor in the effects of capital purchases like buying a building or major equipment.
Projections can help you answer questions and make decisions, especially if you create different scenarios. Here are some examples:
- If your organization wants to create a small operating reserve to act as a cushion for lean years, you may need to think of different ways you can increase revenue, decrease expenses, or both, to achieve a surplus at the end of the year which will add to your reserve. You can create and compare scenarios that achieve this goal in different ways, to help you choose the best option for your organization.
- If your organization is a theater that offers different types of free performances, you could make projections for two different program plans with different expense information. These projections could show your program staff and board how much you would need to raise in contributions if you put on a season of four straight plays, versus two straight plays and one musical.
- If your organization wants to reverse a deficit, and your board wants to consider different staffing scenarios that would reduce personnel costs, you could look at how reducing staff, reducing benefits, instituting staff furloughs, making staff part-time, or a combination of any of these would affect the total expenses of your organization.
There are many ways to create projections.
- Your accounting software might have a budgeting module.
- You can use Excel to create annual budgets, program budgets, forecasts, long-range financial plans, or ad hoc projections.
- The DataArts’ Make a Projection tool allows you to view a 5-year trend of historic data in graphic and data table formats, project up to 5 future years, and download the charts and tables for inclusion in your own reports.
For more on financial projections, see:
How to make financial projections
