The terms Financial Modeling and projections seem to be used interchangeably. Both are essential for decision making processes in a business, both are assuming potential revenue and still, there is a subtle difference between the two. On the surface it may seem almost unnoticeable, but nonetheless, it exists. Financial Projections Business Plan catch investors attention, and are overall useful for operating a business. But can they be swapped for financial models? When there is a question of purpose, the line between the two can be blurred.
What are they exactly?
Financial modeling in the context of financial projections is a process of creating a spreadsheet using a company's history in sales to create and predict future patterns. It is an essential tool for decision making. It is all about making calculations and assumptions about a future event or an impact a certain decision may have on business' operations. These models are mathematical models with many variables. They can be used to calculate different scenarios by changing a single variable. Companies use them for strategizing and planning projects, determining budgets etc.
Financial projections in a business plan set numbers, created using financial modeling. Its purpose is to set goals for the company and put plans in place to achieve them. It is often used as a guide for businesses to keep track of their operations and progress. Therefore, it is advised to make constant revisions and changes to projections. Startups can make these revisions on a monthly basis, but most businesses make quarterly or yearly forecasts.
How are they different?
While the differences between financial modeling and Financial Projections in a business plan may be hard to spot, there are a couple of them to keep in mind:
The difference in audience - financial models are usually internal documents intended for a company’s use only, while financial forecasts can be presented to potential investors to gain investments or raise capital. They can be used to showcase a company's potential and value in the market.
The difference in format and use - Projections are goals used to keep a company on track, while models are a sum of numbers that show all the different paths a company may take to achieve its goals. Models change, projects once set do not. In a sense each one relies on the other. And paradoxically, this difference is where they are starting to be one and the same.
How are they the same?
Simply put, you can’t have financial projections without financial modeling, and vice versa. Financial models also require goals, and predictions to calculate all possible outcomes. A best, and worst case scenario is needed for constructing the most accurate models and predictions.
In order to change a potential outcome an initial goal is needed, because without it, there are no variables to change and therefore no modeling either. Financial forecasts require numbers, modeling can provide. To plan for the best possible scenario, models are necessary to make the right decisions and choose the right form of action.
Take the help you can get
Because of all of this nuance, composing Financial Projections Business Plan can seem harrowing, therefore it can be of great help to consult with the professionals. Experts at Joorney can give a helping hand in composing financial projections for your business plan.
In conclusion...
Even though they are different documents, there are also similarities between the two that makes it difficult to tell them apart, especially if you are not hands on with them. Just like financial projections, financial modeling also relies on predictions and assumptions.
The difference is that Financial Modeling is the act of – in this instance – arriving at the financial projections of the business plan. The financial projections themselves are the result of financial modeling.
Because these items are so closely tied together and both require a deep understanding of the process to create, as well as spreadsheet prowess, you may want to consider consulting professionals, like Joorney.
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