Organizations have realized that they need both a more flexible, adaptable plan, as well as a long term vision. The combination makes forecasting extremely difficult to predict. Creating a rolling forecast combines all these aspects and leaves room for constant upgrades to top it all off.
Rolling forecasts can either serve as a supplement for the fiscal year forecast or they can replace it. Rolling forecasts are useful as a management tool, as the same period of time is always predicted going forward. For example, if the forecasting horizon is 12 months (the most common period), then the company will constantly have a 12 month future plan. When January ends, the rolling forecast adds on February of the following year, thus keeping the forecast at a full year of long term planning. The length of the forward-thinking rolling forecast always stays the same (unless the company decides to change the model), and it is the month to month adaptations that “roll” over and change according to the need.
Advantages of rolling forecasts
Higher Accuracy
Even before the pandemic, many companies found that traditional annual budgeting just wasn’t cutting it. After setting a budget a year in advance without making changes, by the time the end of the year comes around, much of the data is inaccurate or not as efficient as it should be. Rolling forecasts allows you to make quick tweaks along the way instead of letting the one small error grow bigger each month. At any given point in time, if executives need to make quick decisions that affect the future, the data and forecasts are up to date and as accurate as possible, in order to make the most thorough decisions on the fly. This is a huge advantage for those who want to stay ahead of the competition.
Better agility
In addition to accuracy, the level of agility also skyrockets, creating the same effect of staying ahead of the game. This is particularly advantageous for time sensitive decisions and not letting the accuracy get out of hand. Markets are increasingly volatile and planning once a year will push problems further down the line until the once-a-year budgeting becomes a complete financial reform. The agility of rolling forecasts prevents all of this.
Being in the driver (based) seat
Making the change from relying on previous data to using current feed that is updated consistently, is not only a physical change in the company, but is also a mentality switch. It puts more responsibility on every department, as they are now accountable in real time with direct implications on the updated budget and company results. Market share, customer satisfaction, and specific category growth all allow for driver based forecasting to improve the budget quality and process.
Encourages communication and strategy
An indirect advantage of rolling forecasts is that it forces companies to communicate and create more in depth strategies across the entire organization. In the same way that all heads of departments are held accountable, they are also encouraged to take initiative by contributing strategies and forward thinking. This is in everyone’s best interest as the budget is all-encompassing and yet another way for the company to set checkpoints and goals.
Monitoring cash flow
Rolling forecasts particularly come in handy when it comes to cash flow. Approaching investors with up-to-date and in depth data about every aspect of the cash flow will greatly impress them and increase your chances of investments in the company. Stakeholders as well, appreciate accurate data and it increases the professionality and organizational management of the company.
Cons of rolling forecasts
Time and Resources
Time is obviously the biggest factor, as rolling forecasts take an exponential more amount of time to create than the classic annual budget. For monthly rolling updates, bigger companies can sometimes take more than half of the month to update the forecasts, before the next one needs to get started soon after. When finance teams have limited resources, (such as smaller companies whose finance teams take on multiple roles), rolling forecasts are not always an option when it comes at the expense of other important responsibilities. Ironically, growing companies may need rolling forecasts even more than established ones due to the fast paced changes that constantly occur, but they usually have more limited resources and time, which blocks them from making the change.
Tracking and managing is complex
As the business grows, the complexity of tracking the data and budget processes becomes more complicated as well. Usually, it takes a while for the resources to catch up with the speed of the company’s growth. Finance teams will struggle to stay on pace with the rest of their workload in the intermediate phase between company growth and the company responding with expanding the resources and employment. Overall it becomes harder to track changes in drivers as the company grows and many executives don’t want this to come at the expense of other responsibilities.
Harder to Implement
In addition to time and managing, rolling forecasts are simply harder to implement from the beginning. They involve constant changes based on real time data and feedback, and the daunting thought of the processes involved is enough to turn away many companies from rolling forecasts.
When do rolling forecasts make sense?
The volatility of the market is shifting more and more. Areas that were always volatile have become far more unpredictable, and even traditionally stable sectors have become unstable. In a perfect world, a company should have both rolling and traditional forecasts, which is the potential maximization for forecasting.
That being said, rolling forecasts don’t have one single format and are rather flexible. This provides an opportunity for every company to implement a version of rolling forecasts that fits their vision. In general, the greater the volatility, the shorter the interval should be for creating and adjusting rolling forecasts. However, if a company is short on resources or time, creating a less frequent rolling framework is a great starting point and can be adjusted when needed.
How to create a rolling forecast
Step 1: Implement a CPM automation solution
If your company isn’t using one yet, then this is the first step. CPM solutions, such as Datarails, will consolidate and automate the budgeting and forecasting, and save a tremendous amount of time on manual entries. Regardless of whether you implement rolling forecasts right away, data automation will help you free up more time for analysis, and create one true source of data to create the most efficient financial planning possible. In regards to rolling forecasts, it will automate much of the monthly manual data entries that financial teams dread, and create a more efficient forecast whose KPIs can be changed easily.
Step 2: Identify the Objectives and Drivers
Before beginning to map out the forecast, the goals and objectives need to be stated. This includes what the company wants to achieve by changing to a rolling forecast, who will lead the change, and which departments will contribute and use the data. After identifying the people involved, the high value drivers should be mapped out; for example, sales or cash flow. The more external factors and volatility that exists, the harder it will be to map out the original forecast, but once the outline is in place, the monthly updates will require less time, especially when using CPM automation.
Step 3: Choose the Right Forecasting Horizon
As mentioned above, one of the main benefits of rolling forecasts is that it was created to be individualized. The most common forecasting horizon is 12 months, but for those whose organizations cater to the long term, 16,18, or even 24 months is also an option. The horizon can also be shorter, which might fit the mentality of startups or a company with a significant amount of volatility. However, it is important to analyze all of the options in order to come to a conclusion that is best suited for the company without requiring too many changes. Although rolling forecasts are flexible, changing the forecasting horizon too often will take away many of the benefits of comparison and growth options and erase some of the efficiency.
Step 4: Establish Scenarios
Depending on the drivers of your company’s growth, everyone will run into both positive and negative scenarios at some point. Outlining the possibilities beforehand will help set the tone, and when new challenges or trends emerge later on, the company will be more prepared to adapt to them on the go.
Step 5: Adapt!
The biggest advantage of rolling forecasts is the flexibility and constant forward thinking. Although at the beginning, it may seem like an overwhelming and never ending amount of additional work, the constant updates and long term planning give more room for goal setting and adapting. Changing KPIs and finding the appropriate actions to take to mitigate variances by identifying the sources of the differences should all be actions taken throughout the rolling forecasts. Adapting should be done throughout the forecast process as well as implementing changes where necessary to keep on the projected path-the end goal when creating rolling forecasts.
