How to Leverage Forecasts and Projections for Scaling

Forecasts and projections are not the same thing. Not understanding the difference can lead to catastrophic cash flow, inventory and head count planning decisions for your growing DTC brand. In this article, I’ll teach you the difference between forecasts and projections and how to leverage each to reach your scaling goals. 

Forecasts and Projections – What’s the Difference?

Forecasts and projections are two terms that are often used interchangeably. But in reality, they have distinct meanings and applications. Understanding the difference between forecasts and projections can make the difference between successful scaling and a scaling disaster.

Forecasts are attempts to predict or estimate the future based on historical data. They provide the statistically unbiased, most probable expected outcome of a given system. Forecasts tend to be more useful for tactical, short-term planning decisions.

Projections, on the other hand, are "what-if" scenarios. They are future values or outcomes based on a set of underlying assumptions that you can manipulate yourself to model different possible scenarios. Projections tend to be applied to longer future time horizons and are useful for longer-term strategic planning.

When to Use Forecasts

I recommend using forecasts in the context of short-term, tactical planning. Generally, I tend to use forecasts for tactical decisions that will impact the business within the next three months. Forecast accuracy tends to decrease quickly beyond this time horizon and thus becomes riskier to use for tactical decision-making.

As a Fractional CFO, one of my key roles is to advise DTC brands on how to properly utilize forecasts.

Here are a few examples:

1. Forecast near-term SKU-level sales trends to drive tactical operational plans and inventory replenishment orders.

2. Forecast near-term weekly cash flows to support decisions like:

   • How much ad spend the business can afford this week.

   • How much inventory the business can afford to purchase in three weeks when a new PO needs to be issued.

   • Confirm the business can afford the two new hires in the pipeline that are slated to start in two weeks.

These are all great examples of how to leverage forecasts for managing the inventory and cash flow health of your business. 

When to Use Projections

I recommend using projections for longer-term strategic planning and goal setting. Remember - beyond my recommended three-month forecasting time horizon, forecast accuracy tends to decrease quickly. As a result, if I’m planning beyond three months in the future, I like to use projections driven by “what if” assumptions to make up for the breakdown in forecast accuracy.

I often advise brands to use projection scenarios to answer questions like:

1. "What would it take to increase our contribution margin from 50% to 60%?"

2. "What would the business look like if we scaled up Amazon 50% faster than our Shopify store?"

3. “What combinations of revenue and MER would drive a 20% EBITDA over the next 12 months while holding the rest of our margin and overhead structure constant?”

Modeling these scenarios using projections can help identify the specific actions required to achieve a given goal.

Another way I like to think about it is this - creating projection scenarios can help me answer the question, “What would need to be true for the business to achieve [fill in the blank].” Once you are armed with the answer to this question, you and your leadership team can put your creativity to work and develop strategies that bring that future desired outcome to fruition.

Common Mistakes to Avoid

1. Using stretch sales goal projections to make short-term cash flow and inventory planning decisions. If you align inventory and cash flow plans with achieving big stretch sales goals, you might make the mistake of ordering more inventory than you can realistically sell in the short term, which can lead to cash flow problems and excess inventory.

2. Unclear communication with your team about forecasts and projections. When communicating with your team, it's critical to clarify whether you're discussing a forecast grounded in historical data or a projection based on assumptions. This will keep everyone on the same page and improve decision-making.

3. Failing to dig in and understand underlying assumptions in a projection. Projections are heavily based on assumptions, and it's essential to identify and assess each assumption's validity to ensure that the projection is realistic. This can help identify potential risks and opportunities and enable the brand to make better decisions.

Conclusion

Understanding the difference between forecasts and projections is essential for successfully scaling your DTC brand. Use forecasts for short-term planning based on historical data, and projections for longer-term planning based on assumptions and modeling different scenarios. Avoid the common mistake of relying too heavily on projections for short-term decisions, and instead use them to guide your longer-term growth strategy. With the right balance of forecasts and projections, you can achieve your scaling goals with ease.

If the thought of building out the proper forecast and projection process within your business overwhelms you, and you don’t have a CFO on your team, consider hiring a Fractional CFO to help.

At Free to Grow CFO we provide founders of DTC brands with the executive-level CFO advice and expertise to scale alongside healthy profit, cash flow, and confidence.

And – we are experts at using forecasts and projections to drive scale.

If you want to learn more about how we can help – click here to book an intro call.

Until next time, scale on!