Lesson: Introduction to Forecasting and Projection

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, breaks down the basics of forecasting and projecting within the Business Environment and Concepts (BEC) realm, where wearing the hat of a manager or high-level executive becomes crucial for strategic planning. By exploring why forecasting and projection are essential tools for anticipating future business changes, Nick clarifies the role of projections in simulating various 'what-if' scenarios, typically used for internal decision-making. He also introduces sensitivity and scenario analysis, key sim-based topics that will be examined in greater detail. Moving on, Nick distinguishes forecasts as instruments predicting the most likely business outcomes, and explains their importance in external communications with stakeholders such as banks and investors, while also acknowledging their internal utility. Get ready to dive into the nitty-gritty of projections and how they contrast with forecasts to aid in navigating the future of a business.

Updated: May 31, 2022 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Let's introduce ourselves to what we're going to be seeing for forecasting and projecting. We're a company, right? We're in BEC. We are wearing the hat of manager of company CEO, CFO, high level executives for our company. And why is this important?

Well, because we want to be able to predict what may happen in the future. What happens if we change one component of our business and predict and account for different variations of possibilities for our firm. Now we have projections. What are projections? We see this term we are going to think forward looking and these are precursors to forecasts.

Meaning precursor is something that comes before so focuses on a desired outcome and displays multiple what-if scenarios. Typically, projections are used internally. Now we are going to see sensitivity and scenario analyses. These are common Sims, as I say here. They're all heavily Sim-based topics and we will see these more in depth.

Now these are both types of projections and get ready because we're going to dive into those. But forecasts, forecasts, these are also forward looking and these predict the most likely outcome of a business. So it's a little more realistic. Projections could say, oh, what if we account for an increase in sales? Or what if we account for a decrease in sales?

Forecasts are the most likely scenario and as such they're used externally to show to a bank, a client, auditor, or investors. It's a little more grounded, a little more conservative. It can also be used for internal purposes. But generally if you want to present someone or an entity or individual or company with how your firm is going to be dealing, likely in the future, you will give them a forecast. That's the difference.

We have forecast and then projection. Now

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