A rolling forecast evolves with your business. It’s a living, breathing document that is always updated for say, 12 months out, with most companies rolling it forward each month or quarter.
In today’s ever-changing business environment, relying on an annual, static budget to review performance and set expectations is simply no longer enough. Today’s agile companies require reporting and analytics to make informed decisions to see what’s ahead and keep the company on track throughout the year. A budget is a crucial piece to this, there’s no doubt. However, implementing a rolling forecast provides the kind of up-to-date information that leadership craves.
So why doesn’t everyone do this? The challenge is that rolling forecasts traditionally required a lot of effort and attention. Roughly 20% of companies have tried and failed to implement these gems. Why? The main reason is that they’re much more time consuming and complicated when it comes to upkeep. Thankfully, there are a few hacks companies can take to get on a roll with their forecasts today.
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The Difference Between Rolling Forecasts and Static Budgets
Budgets are the bedrock of planning. Not only can they help companies allocate resources to meet their strategic goals, but they also create accountability for teams to spend resources responsibly. The challenge with static budgets is that they take a “set it and forget it” approach. They’re generally created towards the end of the prior fiscal year using data available at that time. From there, the budget remains unchanged for the next year. Because of its static nature, a traditional budget can become outdated and stale within just a few months of roll out.
How do businesses overcome this challenge? Enter: the rolling forecast.
As the business evolves, a rolling forecast evolves with it. It’s a living, breathing document that is always updated for say, 12 months out, with most companies rolling it forward each month or quarter. Forecasting compliments the budget by consistently evaluating projections based on the most up-to-date information available. Some companies may not realize they already have a rolling budget, it’s just buried in that “master Excel model” on someone’s desktop that’s updated every time a major change is identified.
As an example, take the COVID-19 pandemic. Suppose a company in the restaurant supply industry, perhaps a large supplier to restaurants, created its budget in October of 2019. In 2020, they likely expected to see business as usual or even steady growth. Once March of 2020 came about, all of that changed and it was unlikely that their budget had any ground to stand on. If they had stuck to their original budget and continued spending resources as initially planned, their business would have likely failed.
Instead, creating a forecast and updating it with industry data as it changes throughout the year would have allowed that company to shift its focus and re-allocate resources as needed. The rolling forecast would be the ultimate saving grace to the business. While COVID-19 is an extreme scenario, every business can benefit from forward-looking data and accurate projections throughout the year.
Why Implement a Rolling Forecast?
React to Changes
A rolling forecast enables a company to adjust its approach to meeting goals as new information is learned throughout the year. Instead of relying solely on a static budget to guide their decisions, leadership can react to the fluctuations or uncertainty that may be driving the economy and industry.
With accurate and up-to-date data, companies can determine if company resources need to be reallocated in order to stay on track. With market conditions changing frequently, it’s crucial that organizations can react to those shifts and adapt to new demands or trends.
Make Informed Decisions
Having an updated forecast each quarter or month allows business leaders to make strategic decisions with the best information available. Rolling forecasts allow leadership to make quick adjustments to spending as a response to current market data. This creates a better planning environment and helps the company stay ahead of the curve while they navigate economic changes.
Set Realistic Goals
With a rolling forecast, plans are updated on a regular timeline to project what the future holds. Since it’s an ever-evolving document with regular updates, it creates an easy way to maintain a realistic set of strategic goals. As new information is considered, it may be determined that prior goals are no longer realistic for the company. A rolling forecast can keep the company moving towards success, even if the targets shift along the way.
Steps to Developing and Managing a Rolling Forecast
1. Determine the End Goal
Creating a rolling forecast is similar to undergoing any other type of planning process. Creating an objective helps the Finance Team decide how the forecast will be used and what decisions it will help to make. Knowing that information will help tremendously as the team navigates through the next several steps of forecasting.
2. Set the Horizon and Increments
A rolling forecast’s horizon decides how far into the future the forecast projects data. The increments determine how often the forecast is rolled forward. The dynamic nature of a business combined with a company’s sensitivity to market conditions decides both the time horizon and increments for a rolling forecast.
Businesses that are very dynamic and have a high sensitivity to market conditions might need to react to market changes much more rapidly than a more static and stable business. For example, a cell phone service provider may not experience great fluctuations in business during economic shifts because they provide something that most people view as a necessity. However, a meal subscription service may experience greater volatility during market shifts as consumers look for ways to improve their cash flow when finances become uncertain.
In this example, a cell phone service provider likely won’t need to roll their forecast as frequently as a meal subscription service. The more dynamic the company and the higher the market sensitivity, the more frequent the forecast should be rolled. Most companies choose to have a time horizon of 4 to 8 quarters.
3. Decide on the Detail Level
Each company has a unique perspective on how detailed a forecast should be. The level of detail should be based on how detrimental making a poor decision based on bad data would be to the company. If there is a high risk of significant consequences, then it’s imperative that the data be as accurate as possible while providing as much detail as possible. While this can be more time consuming for the Finance Team, it will undoubtedly help the company move closer to their strategic goals.
4. Engage Key Contributors
A rolling forecast’s success is only as good as the data that goes into it, like it’s drivers and assumptions. The best people to provide updates to drivers and assumptions are the managers and contributors throughout the organization. The Finance Team should take the time to include key stakeholders in the forecasting process, and provide a clear set of templates and process guidelines for those contributors.
5. Identify Quantitative and Non-Quantitative Assumptions
Rolling forecasts should provide a higher level of interpretive data than a static budget. Where a budget might list thousands of lines of data, forecasts need only focus on what pieces of the business are most impactful – these are often referred to as key drivers and assumptions. Rather than dive into how many pens were purchased for the office in a given quarter, leadership may want to know how many new subscriptions were gained for their service or what the price per unit was for a product.
6. Gather the Data
Rolling forecasts generally start with a fully completed budget. Budgets act as a starting point and reference to roll the first new forecast. Forecasts use the actual figures from each period and are typically rolled every quarter unless the business or market changes rapidly enough to justify a monthly update.
When gathering the data for the forecast, it’s important to thoroughly vet each source. Industry statistics and developments will be used to project what the future may hold. Rather than relying on any random source, work to utilize credible information that has been verified by industry leaders to ensure a quality forecast and alleviate risk for poor decisions.
7. Establish Scenarios
The best part of a rolling forecast is the ability to consider a wide array of scenarios and “what-if” analysis tests. Using different scenarios, the Finance Team can project a range of possibilities and determine their impact on company finances. Each time the forecast is rolled forward, the scenarios can be tweaked and adjusted based on the newest information available.
One best practice we recommend is to have a “Base Case” forecast that is ever evolving. That Base Case can then be copied and saved each time a rolling forecast is locked. For example, if a company forecasts monthly, the base case would be copied at the end of each month for the Jan Forecast, Feb Forecast, March Forecast, etc.
8. Institute a Regular Variance Analysis Process
Sometimes referred to as “Performance Management” or “BvA”, tracking actual performance and comparing it to the forecasted data on a regular basis will help leadership understand which targets were met or not, and why it happened. Using that information, a more reliable projection can be made for the next forecast.
Variances are a normal part of forecasting. What’s important is that the Finance Team reflects on the reasons for the variances, what can be done about the variances in the future, and then pivots in order to accommodate those answers. Variances should be analyzed for both failures and successes.
9. Course Correct
Each time a variance is found and the forecast is showing a different result than what was initially projected, it’s important to course correct. This agility helps the company overcome its challenges and prepare for what is likely to take place in the future. Many times, course-correcting can involve cutting costs in one area in order to double-down or reallocate resources to a different area of the company.
Keep it Rolling
Creating and implementing a rolling forecast is the perfect complement to a static budget. While a static budget can provide the detail behind each line item, a rolling forecast offers projections based on current business data and market trends. It allows companies to react to their environments quickly while upholding realistic goals. While many companies fail to implement this living document due to its complexity and time commitment, those that do are in an exponentially stronger position to succeed. With some extra attention, a rolling forecast can help companies hit the mark and realize their strategic goals more consistently.