Is there a difference between a financial forecast and a financial prognosis?

The difference between forecast and forecast; they are both tools used in financial planning and analysis to predict future financial performance.

Although they have similar purposes, there are some important differences between financial forecast and forecast.

Literal translation

Translated into Dutch, you could probably use the word ‘prediction’ for both terms. And that is correct, but as technical terms they have a different meaning. We will explain the difference below.

Predicting the near future

A financial forecast is a structured estimate of future financial results based on historical data, expected costs, future trends and internal information.

The purpose of a forecast is to gain insight into the expected figures; turnover, expenses and profitability in the short term, usually for a period of one year.

Looking back and forward

A forecast is based on quantitative models, historical financial data and trends and figures from a certain period, market analyses, historical financial data such as past performance and realized costs, known fixed costs and indirect costs and internal expectations.

It is often used as an operational tool to determine budgets, set financial objectives and support operational decisions within a company.

Financial forecasting is more

Financial forecasting goes beyond just predicting revenues and expenses; it often includes balance sheet forecasts, cash flow forecasts, and other financial indicators.

Balance sheet forecasts refer to predictions of a company’s financial condition at a specific point in time, usually at the end of a fiscal year.

Cash flow forecasts, on the other hand, focus on predicting a company’s cash inflows and outflows over a period of time.

What does the balance sheet forecast consist of

They include the assets, liabilities, and equity of the company. Forecasting helps identify potential liquidity problems, assess debt positions, and determine the financial stability of a company.

By creating realistic and accurate forecasts, companies can better align their financial strategies with future needs and challenges.

What is a cash flow forecast or cash flow forecast

This includes operating cash flow (sales of goods or services), investing cash flow (purchase of assets or investments) and financing cash flow (loans, share issues or dividend payments).

Cash flow forecasts help assess a company’s liquidity position and identify any shortfalls or surpluses in cash flows. They provide valuable insights into a company’s ability to meet its short-term obligations and invest in growth and development.

Ah yes! moment

The key difference between a financial forecast and a financial forecast is therefore the time period and the level of detail that is being forecasted. A forecast focuses on short-term planning, often within one year, and involves operational decisions and budgeting.

A financial forecast, on the other hand, focuses on the long term, often several years, and involves strategic planning and investment decisions.

Even more predictions

To predict the potential financial impact of possible opportunities and threats on a company or organization, you can sketch different future outcomes or situations in figures, so-called financial scenarios.

Better prepared

Yet you want to be able to determine a course, planning or strategy based on a sound financial forecast. You do this by combining the above-mentioned uncertain variables and creating different combinations. 

In this way, scenarios and expectations can be drawn up that predict different possible future situations. The future expectations in terms of liquidity forecast are especially interesting and important.

The bill can be paid

The liquidity forecast of the financial result and the short-term financial future is important. The results must of course always be and remain higher than the costs.

You must make forecasts to estimate that you can meet your financial obligations, such as paying your creditors, interest and repayments, rent, personnel costs and sales tax, because otherwise the company will go bankrupt.

Future financial situation & solvency

As a company, you are solvable if you have good financial prospects and coverage in the (somewhat) longer term. It is the ratio between the equity and the total assets of a company.

It shows whether a company is financially healthy and whether it can pay off its debts in the long term.

Equity is the difference between a company's assets and debts, while debt is money that the company has borrowed to make investments, such as in machinery, for example.

A practical example

In practice, it does happen that an organization is in a slightly worse position in terms of liquidity for a short period of time due to unforeseen circumstances, while its solvency simply looks good. 

For example, when a guaranteed order first has to be purchased. No reason to panic, but take this into account when drawing up financial forecasts, such as an expected profit and loss account.

Keep them rolling; rolling forecasts