2017-01-10 00:00:00 Finance and Accounting English Learn the difference between linear and exponential growth and see how these ideas can be used to create better business forecasts. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/01/08213817/Financial-advisor-reviews-line-items-in-accounting-software.jpg Forecast More Wisely: Linear vs. Exponential Line Items

Forecast More Wisely: Linear vs. Exponential Line Items

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When you understand the difference between linear and exponential growth, you can apply these concepts to line items within forecasts for the balance sheet, income statement, and cash flow statement for your small business. Linear growth means that grows at the same unit amount over equal time periods.

  • Example 1 (plus two each year): 100, 102, 104, 106, 108
  • Example 2 (plus five each year): 25, 30, 35, 40, 45

Exponential growth means that an item grows at the same rate over time periods.

  • Example 3 (10% growth each year): 100, 110, 121, 133.1, 146.4
  • Example 4 (30% growth each year): 100, 130, 169, 219.7, 285.6

With exponential growth, the previous increases also increase each year, which is precisely what makes it a compounding effect. Study your business’s past results to identify which line items are exponential and which are linear, and project forward from there for more accurate forecasting.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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