Rolling forecasts continue to challenge the traditional budget for finance supremacy in today’s increasingly agile and competitive global economy.
In this article, we'll explore why organizations need a forecast in the first place, some of the challenges you can expect when considering a move to a rolling forecast model, best practices, and advice on different forecasting tools.
Let’s first examine rolling forecast best practices for mid-sized and larger organizations. Knowledge of all aspects of the business, including income streams and expenses, is critical to facilitating full visibility around future investment opportunities and crisis management planning.
As a business grows and expands, so does the need for a safe and reliable method to manage its finances, today and in the months and years ahead. In parallel, the process of collating and analyzing data also increases as does the need for a complete and real-time view of the business as a whole. As a result of this need for visibility, most organizations operate a budgeting and planning process from which a standard of performance can be managed across all areas of the business.
Traditionally, and in the simplest of terms, the budgeting and planning process looks something like this: decide a static forecast (budget) tied to specific performance (target) e.g. sales revenues, business expenses, etc., then simply track actual performance against the pre-agreed targets, analyze and correct via re-forecast as you move through the financial year.
Unfortunately, the traditional budget can sometimes fall short across a number of areas:
The rolling forecast addresses some of the above shortcomings as it requires a re-calibration of the forecast on a monthly or quarterly basis which considers what’s actually happening in the business, rather than what was estimated some months prior.
Real-time decision-making allows businesses to direct resources efficiently and provides business leaders with a full twelve-month vision at any given point in the year.
In addition, flexibility exists in determining the rolling forecast period and horizon which can be determined according to business exposure levels to market flux and influence. A good rule of thumb suggests, the more market dependant your business, the more frequent and shorter your rolling forecast time horizon needs to be in order to adapt quickly to change.
For all its obvious benefits, various industry surveys estimate approximately 40% of companies currently use a rolling forecast model. Whilst only a few companies have decided to completely replace the static annual budget in favor of the continuous rolling forecast, a large portion of those adopting a rolling forecast utilize it alongside, not in place of, the traditional static budget.
The traditional static budget is also still considered sufficient, by many organizations, to provide a useful guide working in parallel to long-term strategic planning.
Implementation of a rolling forecast model can also prove to challenge as it requires frequent real-time data input from across the business, further hindered by an overreliance on error-prone spreadsheets and manual, labor-intensive processes.
Most organizations are structured to fit around traditional budgeting methods & processes - trying to change how people work and perceive the value of a new process can be a hard habit to break. Implementing a new forecasting methodology is no exception – here are some quick tips around key areas of focus to consider when planning a move to the rolling forecast model:
Traditional static budgets still play a key role in ‘painting a financial picture’ from a strategic plan, but they are generally inflexible and reactive and can foster unwelcome levels of operational despondency.
Rolling forecasts on the other hand are pliable and dynamic by nature. Whilst they may not be replacements for an annual static budget, they work very well in parallel.
As businesses grow, forecasting can become increasingly difficult to manage due to the volume of internal stakeholder relationships involved in the process and the data accuracy required to execute the forecast efficiently and effectively.
Having the right tools in place can also prove a significant advantage with organizations who have invested in cloud & remote working technologies proving better equipped to deal with unforeseen challenges such as the unprecedented pandemics and political instability. Specialist cloud-based systems are fast replacing spreadsheets as the forecasting tool of choice, allowing businesses to access data from anywhere, quickly, efficiently, and accurately.