What is a financial projection?

A financial projection serves as a predictive tool that helps individuals or businesses forecast their future financial performance based on various assumptions and estimates. This involves analyzing potential income, expenses, profits, and cash flow over a specified period, taking into consideration various economic factors and market conditions. This estimation is crucial for planning and decision-making processes, allowing business owners to set realistic targets and strategies for growth.

In contrast, the other options represent different concepts. The estimate of past financial performance refers to historical data and does not provide insights into future performance. An actual report on current revenues and expenses focuses on real-time data rather than projections. A method for calculating gross profit is a financial metric but does not encompass the broader notion of forecasting future financial health that a financial projection entails. Thus, understanding financial projections is vital for effective business planning and resource allocation.